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Expected Returns: An Investor's Guide to Harvesting Market Rewards

Book 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

  1. Title Page
  2. Copyright Page
  3. Foreword
  4. Dedication
  5. Acknowledgments
  6. Abbreviations and acronyms
  7. Disclaimer
  8. Part I - Overview, historical returns, and academic theories
    1. Chapter 1 - Introduction
      1. 1.1 HISTORICAL PERFORMANCE
      2. 1.2 FINANCIAL AND BEHAVIORAL THEORIES: A BRIEF HISTORY OF IDEAS
      3. 1.3 FORWARD-LOOKING INDICATORS
      4. 1.4 VIEW-BASED EXPECTED RETURNS
      5. 1.5 GENERAL COMMENTS ABOUT THE BOOK
      6. 1.6 NOTES
    2. Chapter 2 - Whetting the appetite: Historical averages and forward-looking returns
      1. 2.1 HISTORICAL PERFORMANCE SINCE 1990
      2. 2.2 SAMPLE-SPECIFIC RESULTS: DEALING WITH THE PITFALLS
      3. 2.3 FORWARD-LOOKING RETURN INDICATORS
      4. 2.4 NOTES
    3. Chapter 3 - The historical record: The past 20 years in a longer perspective
      1. 3.1 STOCKS
      2. 3.2 BONDS
      3. 3.3 REAL ASSET INVESTING AND ACTIVE INVESTING
      4. 3.4 FX AND MONEY MARKETS
      5. 3.5 REAL RETURN HISTORIES
      6. 3.6 NOTES
    4. Chapter 4 - Road map to terminology
      1. 4.1 CONSTANT OR TIME-VARYING EXPECTED RETURNS?
      2. 4.2 RATIONAL OR IRRATIONAL EXPECTATIONS FORMATION?
      3. 4.3 RETURN MEASUREMENT ISSUES
      4. 4.4. RETURNS IN WHAT CURRENCY?
      5. 4.5 RISK-ADJUSTED RETURNS
      6. 4.6 BIASED RETURNS
      7. 4.7 NOTES
    5. Chapter 5 - Rational theories on expected return determination
      1. 5.1 THE OLD WORLD
      2. 5.2 THE NEW WORLD
      3. 5.3 DETOUR: A BRIEF SURVEY OF THE EFFICIENT MARKETS HYPOTHESIS
      4. 5.4 NOTES
    6. Chapter 6 - Behavioral finance
      1. 6.1 LIMITS TO ARBITRAGE
      2. 6.2 PSYCHOLOGY
      3. 6.3 APPLICATIONS
      4. 6.4 CONCLUSION
      5. 6.5 NOTES
    7. Chapter 7 - Alternative interpretations for return predictability
      1. 7.1 RISK PREMIA OR MARKET INEFFICIENCY
      2. 7.2 DATA MINING AND OTHER “MIRAGE” EXPLANATIONS
      3. 7.3 NOTES
  9. Part II - A dozen case studies
    1. Chapter 8 - Equity risk premium
      1. 8.1 INTRODUCTION AND TERMINOLOGY
      2. 8.2 THEORIES AND THE EQUITY PREMIUM PUZZLE
      3. 8.3 HISTORICAL EQUITY PREMIUM
      4. 8.4 FORWARD-LOOKING (EX ANTE OBJECTIVE) LONG-TERM EXPECTED RETURN MEASURES
      5. 8.5 SURVEY-BASED SUBJECTIVE EXPECTATIONS
      6. 8.6 TACTICAL FORECASTING FOR MARKET TIMING
      7. 8.7 NOTES
    2. Chapter 9 - Bond risk premium
      1. 9.1 INTRODUCTION, TERMINOLOGY, AND THEORIES
      2. 9.2 HISTORICAL AVERAGE RETURNS
      3. 9.3 ALTERNATIVE EX ANTE MEASURES OF THE BRP
      4. 9.4 YIELD CURVE STEEPNESS: IMPORTANT PREDICTIVE RELATIONS
      5. 9.5 EXPLAINING BRP BEHAVIOR: FIRST TARGETS, THEN FOUR DRIVERS
      6. 9.6 TACTICAL FORECASTING—DURATION TIMING
      7. 9.7 NOTES
    3. Chapter 10 - Credit risk premium
      1. 10.1 INTRODUCTION, TERMINOLOGY, AND THEORY
      2. 10.2 HISTORICAL AVERAGE EXCESS RETURNS
      3. 10.3 FOCUS ON FRONT-END TRADING—A POCKET OF ATTRACTIVE REWARD TO RISK
      4. 10.4 UNDERSTANDING CREDIT SPREADS AND THEIR DRIVERS
      5. 10.5 TACTICAL FORECASTING OF CORPORATE BOND OUTPERFORMANCE
      6. 10.6 ASSESSING OTHER NON-GOVERNMENT DEBT
      7. 10.7 CONCLUDING REMARKS
      8. 10.8 NOTES
    4. Chapter 11 - Alternative asset premia
      1. 11.1 INTRODUCTION TO ALTERNATIVES
      2. 11.2 REAL ESTATE
      3. 11.3 COMMODITIES
      4. 11.4 HEDGE FUNDS
      5. 11.5 PRIVATE EQUITY FUNDS
      6. 11.6 NOTES
    5. Chapter 12 - Value-oriented equity selection
      1. 12.1 INTRODUCTION TO DYNAMIC STRATEGIES
      2. 12.2 EQUITY VALUE: INTRODUCTION AND HISTORICAL PERFORMANCE
      3. 12.3 TWEAKS INCLUDING STYLE TIMING
      4. 12.4 THE REASONS VALUE WORKS
      5. 12.5 DOES THE VALUE STRATEGY WORK IN EQUITIES BEYOND INDIVIDUAL STOCK SELECTION ...
      6. 12.6 RELATIONS BETWEEN VALUE AND OTHER INDICATORS FOR EQUITY SELECTION
      7. 12.7 NOTES
    6. Chapter 13 - Currency carry
      1. 13.1 INTRODUCTION
      2. 13.2 HISTORICAL AVERAGE RETURNS
      3. 13.3 IMPROVEMENTS/REFINEMENTS TO THE BASELINE CARRY STRATEGY
      4. 13.4 WHY DO CARRY STRATEGIES WORK?
      5. 13.5 CARRY HERE, CARRY THERE, CARRY EVERYWHERE
      6. 13.6 NOTES
    7. Chapter 14 - Commodity momentum and trend following
      1. 14.1 INTRODUCTION
      2. 14.2 PERFORMANCE OF SIMPLE COMMODITY MOMENTUM STRATEGIES
      3. 14.3 TWEAKS
      4. 14.4 WHY DOES MOMENTUM—SUCH A NAIVE STRATEGY—WORK?
      5. 14.5 MOMENTUM IN OTHER ASSET CLASSES
      6. 14.6 NOTES
    8. Chapter 15 - Volatility selling (on equity indices)
      1. 15.1 INTRODUCTION
      2. 15.2 HISTORICAL PERFORMANCE OF VOLATILITY-TRADING STRATEGIES
      3. 15.3 TWEAKS/REFINEMENTS
      4. 15.4 THE REASONS VOLATILITY SELLING IS PROFITABLE
      5. 15.5 OTHER ASSETS
      6. 15.6 NOTES
    9. Chapter 16 - Growth factor and growth premium
      1. 16.1 INTRODUCTION TO UNDERLYING FACTORS IN CHAPTERS 16–19
      2. 16.2 INTRODUCTION TO THE GROWTH FACTOR
      3. 16.3 THEORY AND EVIDENCE ON GROWTH
      4. 16.4 ASSET MARKET RELATIONS
      5. 16.5 TIME-VARYING GROWTH PREMIUM
      6. 16.6 NOTES
    10. Chapter 17 - Inflation factor and inflation premium
      1. 17.1 INTRODUCTION
      2. 17.2 INFLATION PROCESS—HISTORY, DETERMINANTS, EXPECTATIONS
      3. 17.3 INFLATION SENSITIVITY OF MAJOR ASSET CLASSES AND THE INFLATION PREMIUM
      4. 17.4 TIME-VARYING INFLATION PREMIUM
      5. 17.5 NOTES
    11. Chapter 18 - Liquidity factor and illiquidity premium
      1. 18.1 INTRODUCTION
      2. 18.2 FACTOR HISTORY: HOW DOES LIQUIDITY ITSELF VARY OVER TIME?
      3. 18.3 HISTORICAL EVIDENCE ON AVERAGE LIQUIDITY-RELATED PREMIA
      4. 18.4 TIME-VARYING ILLIQUIDITY PREMIA
      5. 18.5 NOTE
    12. Chapter 19 - Tail risks (volatility, correlation, skewness)
      1. 19.1 INTRODUCTION
      2. 19.2 FACTOR HISTORY
      3. 19.3 HISTORICAL EVIDENCE ON AVERAGE ASSET RETURNS VS. VOLATILITY AND CORRELATION
      4. 19.4 THEORY AND EVIDENCE ON THE SKEWNESS PREMIUM
      5. 19.5 VERDICT ON WHY HIGH-VOLATILITY ASSETS FARE SO POORLY
      6. 19.6 TIME-VARYING PREMIA FOR TAIL RISK EXPOSURES
      7. 19.7 NOTES
  10. Part III - Back to broader themes
    1. Chapter 20 - Endogenous return and risk: Feedback effects on expected returns
      1. 20.1 FEEDBACK LOOPS ON THE DIRECTION OF RISKY ASSETS
      2. 20.2 FEEDBACK LOOPS ON LESS DIRECTIONAL POSITIONS
      3. 20.3 AGENDA FOR MARKET-TIMERS AND RESEARCHERS
      4. 20.4 NOTES
    2. Chapter 21 - Forward-looking measures of asset returns
      1. 21.1 POPULAR VALUE AND CARRY INDICATORS AND THEIR PITFALLS
      2. 21.2 BUILDING BLOCKS OF EXPECTED RETURNS
      3. 21.3 NOTES
    3. Chapter 22 - Interpreting carry or non-zero yield spreads
      1. 22.1 INTRODUCTION
      2. 22.2 FUTURE EXCESS RETURNS OR MARKET EXPECTATIONS?
      3. 22.3 EMPIRICAL HORSE RACES FOR VARIOUS ASSETS
      4. 22.4 CONCLUSIONS
      5. 22.5 NOTES
    4. Chapter 23 - Survey-based subjective expected returns
      1. 23.1 NOTES
    5. Chapter 24 - Tactical return forecasting models
      1. 24.1 INTRODUCTION
      2. 24.2 WHAT TYPE OF MODEL?
      3. 24.3 WHICH ASSETS/TRADES?
      4. 24.4 WHICH INDICATOR TYPES?
      5. 24.5 ENHANCEMENTS AND PITFALLS
      6. 24.6 NOTES
    6. Chapter 25 - Seasonal regularities
      1. 25.1 SEASONAL, CYCLICAL, AND SECULAR PATTERNS IN ASSET RETURNS
      2. 25.2 MONTHLY SEASONALS AND THE JANUARY EFFECT
      3. 25.3 OTHER SEASONALS
    7. Chapter 26 - Cyclical variation in asset returns
      1. 26.1 TYPICAL BEHAVIOR OF REALIZED RETURNS AND EX ANTE INDICATORS THROUGH THE ...
      2. 26.2 TYPICAL BEHAVIOR OF REALIZED RETURNS AND EX ANTE INDICATORS ACROSS ...
      3. 26.3 NOTES
    8. Chapter 27 - Secular trends and the next 20 years
      1. 27.1 CONTRASTING 1988–2007 WITH 1968–1987
      2. 27.2 REVERSIBLE AND SUSTAINABLE SECULAR TRENDS
      3. 27.3 THE NEXT 20 YEARS
      4. 27.4 NOTES
    9. Chapter 28 - Enhancing returns through managing risks, horizon, skill, and costs
      1. 28.1 INTRODUCTION: HOW CAN INVESTORS ENHANCE RETURNS?
      2. 28.2 RISK
      3. 28.3 INVESTMENT HORIZON
      4. 28.4 SKILL
      5. 28.5 COSTS
      6. 28.6 NOTES
    10. Chapter 29 - Takeaways for long-horizon investors
      1. 29.1 KEY TAKEAWAYS FROM THEORY
      2. 29.2 EMPIRICAL RETURN SOURCES
      3. 29.3 MY TAKE ON KEY DEBATES
      4. 29.4 KNOW THYSELF: LARGE LONG-HORIZON INVESTORS’ NATURAL EDGES
      5. 29.5 INSTITUTIONAL PRACTICES
      6. 29.6 NOTES
  11. Appendix A - World wealth
  12. Appendix B - Data sources and data-series construction
  13. Bibliography
  14. Index