countries comprise approximately 35 securities.9 Theoretical Explanations for Asset Class and Country Predictability One question one might ask is whether we should expect to be able to forecast the returns on countries and asset classes. At one level we could simply draw the analogy to active management within asset classes and ask why if active management can add value within asset classes should it not be able to add value across countries or asset classes? However, we can be more constructive than this. We believe that the tradable assets within GTAA should be forecastable on a theoretical basis both because of market equilibrium and because of market inefficiency. An equilibrium model informs us about the relationship between risk and expected return. Individual investors within the aggregate market have different perceptions of risk that lead to risk-sharing equilibriums in which some investors buy risks that others sell. For example, a bank's short-term liabilities make it risky to hold long-term bonds, whereas a pension plan generally has longer-term liabilities that cause it to prefer longer-maturity bonds. The relative supply of these types of investors (among other influences, naturally) creates the slope of the yield curve. Imagine now a mean-variance investor with a portfolio whose overall volatility is increased the same amount whether additional investments are made in short- or long-term bonds. This investor would prefer the highest-yielding bonds, regardless of maturity. A GTAA strategy managed for this investor, then, could add value by simply overweighting markets where the return to risk is high, and underweighting those where the return is low. This "risk" story is often given for observed return premiums such as value stocks and high-yield bonds. In addition, the risk premiums vary through time and across countries due to changing aggregate supply and demand, as well as the absence of perfectly linked country business cycles. These phenomena create further opportunities to predict returns and do not depend on market inefficiency. We also believe that fore casta bility derives from market inefficiency, by which we mean that markets deviate from their equilibrium levels. In spite of the elegance of the Efficient Markets Hypothesis, we believe there are strong reasons to expect market inefficiency, especially across global capital markets where there is relatively less capital chasing after market inefficiencies than within a given country's markets. In particular, we believe inefficiencies occur due to long-term overreaction and short-term underreaction to information, market segregation, tax effects, and ^Liquid stock index futures markets currently exist in Australia, Belgium, Brazil, Canada, Europe, France, Germany, Hong Kong, Italy, Japan, Korea, Malaysia, the Netherlands, Singapore, South Africa, Spain, Sweden, Switzerland, Taiwan, the United States, and the United Kingdom. Bond futures are liquid in Australia, Canada, Europe, Japan, Switzerland, the United States, and the United Kingdom. The liquid currency markets among developed countries are the Australian dollar, Canadian dollar, European Union euro, Hong Kong dollar, Japanese yen, New Zealand dollar, Norwegian krone, Singapore dollar, Swedish krona, Swiss franc, U.S. dollar, and U.K. pound sterling.