Estimating Long-Term Expected Returns
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Date
2024-07-01
Open Access Location
Authors
Journal Title
Journal ISSN
Volume Title
Publisher
Taylor and Francis Group
Rights
(c) 2024 The Author/s
CC BY-NC-ND 4.0
CC BY-NC-ND 4.0
Abstract
Estimating long-term expected returns as accurately as possible is of critical importance. Researchers typically base their estimates on yield and growth, valuation, or a combined yield, growth, and valuation (“three-component”) framework. We run a horse race of the abilities of different frameworks and input proxies within each framework to estimate 10- and 20-year out-of-sample returns. The three-component model based on the TRCAPE valuation proxy outperforms estimates based on historical mean benchmark returns, with mean square error improvements exceeding 30%. Using this approach in asset allocation decisions results in an improvement in Sharpe ratios of more than 50%.
Description
Keywords
asset allocation, long-term expected returns, three-component model, valuation
Citation
Ma R, Marshall BR, Nguyen NH, Visaltanachoti N. (2024). Estimating Long-Term Expected Returns. Financial Analysts Journal. Latest articles. (pp. 1-21).