PineBridge examines whether the traditional capital market line still holds in a low yield world, questioning if the risk return tradeoff remains linear when starting yields are compressed. The paper suggests that with bonds near historic lows, adding risk may not deliver the same incremental return investors expect.
Bubble, or Structural Imbalance? – Capital Market Line
PineBridge
Research
10 Pages
Key Takeaways
Flattening Capital Market Line: With bond yields near 1–2%, incremental equity risk adds less return, reducing expected excess returns by ~2–3% versus history.
Diminished Diversification Benefit: Lower starting yields mean bonds may offset only ~30–40% of equity drawdowns compared to ~60% historically.
Risk Return Tradeoff Shift: Moving from 60/40 to higher equity allocations increases volatility by ~20% while expected returns rise only ~1–2%.
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