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The historical approach to portfolio analysis is to use past data to estimate the expected rates of return of financial assets and the correlations between the assets (i.e. the variance-covariance matrix). A potential problem with this approach, however, is that even if the returns on two assets have been uncorrelated in the past, they may nevertheless be correlated in the future. This could be the case if the returns on the two assets were closely linked with, for example, protection policy. This relationship would not be revealed by historical time-series data if there had been no significant change in protection policy. Thus, even if returns on these assets have not been closely correlated in the past, we might nevertheless conclude that a portfolio containing both assets is not well diversified if we expect a change in protection policy. In this paper a forward looking approach to portfolio analysis is developed. The first step involves specifying future economic scenarios in terms of the exogenous variables of a computable general equilibrium (hereafter CGE) model. These models represent a rapidly emerging field in applied economic analysis. The CGE model is then solved for the effects of the economic scenarios on Industry rates of return. These projections are then mapped from industries to corporations according to their base-period holdings across industries. Finally, the expected return and risk is projected for any given portfolio of corporate stocks.


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