The Discussion Note is one of several notes forming background for Norges Bank’s upcoming advice on equity share in the benchmark index of the Government Pension Fund Global.
In this note, we evaluate the risk and return characteristics of equities and government bonds, and discuss how the risk and return profile of a portfolio of these asset classes varies with the size of the equity allocation and the duration of the bond allocation. We highlight the relative importance of the three key components that make up the overall portfolio risk-return profile: equity and bond risk-return characteristics and the equity-bond correlation. We show that all three factors have historically had an impact on the risk and return profile of portfolios with different equity allocations.