Expected Returns (an Investor's Guide To Harvesting Market Rewards)

By (author) Ilmanen Antti; Foreword by Asness Clifford
Short description/annotation:
This comprehensive reference delivers a toolkit for harvesting market rewards from a wide range of investments. Written by a world-renowned industry expert, the reference discusses how to forecast returns under different parameters.
Description:
This comprehensive reference delivers a toolkit for harvesting market rewards from a wide range of investments. Written by a world-renowned industry expert, the reference discusses how to forecast returns under different parameters. Expected returns of major asset classes, investment strategies, and the effects of underlying risk factors such as growth, inflation, liquidity, and different risk perspectives, are also explained. Judging expected returns requires balancing historical returns with both theoretical considerations and current market conditions. Expected Returns provides extensive empirical evidence, surveys of risk-based and behavioral theories, and practical insights.
Table of contents:

Foreword by Clifford Asness xi

Acknowledgments xvii

Abbreviations and acronyms xix

Part I Overview, Historical Returns, and Academic Theories 1

1 Introduction 3

1.1 Historical performance 7

1.2 Financial and behavioral theories: A brief history of ideas 9

1.3 Forward-looking indicators 13

1.4 View-based expected returns 15

1.5 General comments about the book 16

1.6 Notes 20

2 Whetting the appetite: Historical averages and forward-looking returns 23

2.1 Historical performance since 1990 24

2.2 Sample-specific results: Dealing with the pitfalls 27

2.3 Forward-looking return indicators 32

2.4 Notes 35

3 The historical record: The past 20 years in a longer perspective 37

3.1 Stocks 39

3.2 Bonds 43

3.3 Real asset investing and active investing 47

3.4 FX and money markets 50

3.5 Real return histories 52

3.6 Notes 52

4 Road map to terminology 57

4.1 Constant or time-varying expected returns? 57

4.2 Rational or irrational expectations formation? 58

4.3 Return measurement issues 59

4.4 Returns in what currency? 60

4.5 Risk-adjusted returns 61

4.6 Biased returns 63

4.7 Notes 63

5 Rational theories on expected return determination 65

5.1 The old world 66

5.2 The new world 68

5.3 Detour: a brief survey of the efficient markets hypothesis 81

5.4 Notes 83

6 Behavioral finance 87

6.1 Limits to arbitrage 87

6.2 Psychology 89

6.3 Applications 98

6.4 Conclusion 106

6.5 Notes 107

7 Alternative interpretations for return predictability 111

7.1 Risk premia or market inefficiency 111

7.2 Data mining and other “mirage'''' explanations 112

7.3 Notes 115

Part II A Dozen Case Studies 117

8 Equity risk premium 119

8.1 Introduction and terminology 119

8.2 Theories and the equity premium puzzle 120

8.3 Historical equity premium 122

8.4 Forward-looking (ex ante objective) long-term expected return measures 128

8.5 Survey-based subjective expectations 141

8.6 Tactical forecasting for market timing 144

8.7 Notes 149

9 Bond risk premium 153

9.1 Introduction, terminology, and theories 153

9.2 Historical average returns 157

9.3 Alternative ex ante measures of the BRP 160

9.4 Yield curve steepness: important predictive relations 161

9.5 Explaining BRP behavior: first targets, then four drivers 164

9.6 Tactical forecasting—duration timing 174

9.7 Notes 177

10 Credit risk premium 179

10.1 Introduction, terminology, and theory 179

10.2 Historical averag