The standard approach to asset allocation is based on portfolio theory, which requires us to estimate expected returns, standard deviations, and correlations. To estimate expected returns, we start by assuming markets are fairly priced; therefore, expected returns represent fair compensation for the degree of risk each asset class contributes to a broadly diversified market portfolio. These returns are called equilibrium returns, and we estimate them by first calculating the beta of each asset class with respect to a broad market portfolio based on historical standard deviations and correlations. Then we estimate the expected return for the market portfolio and the risk-free return. We calculate the equilibrium return of each asset class as the risk-free return plus its beta times the excess return of the market portfolio. Admittedly, the markets are seldom, if ever, in equilibrium, but the pull in this direction is powerful and persistent. Moreover, we can easily adjust the expected return of each asset class to accord with our views about departures from fair value.