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

1

Introduction

• This book covers the general topic of expected returns on investments. The traditional paradigm among institutional investors focuses too much on historical performance and too narrowly on asset class allocation. This book argues that investment decision making should be broadened beyond the asset class perspective and a wider set of inputs should be used for assessing expected returns.

• The book considers in detail a wide range of return sources: major asset classes (stocks, bonds, and alternative investments) and strategy styles (value, carry, momentum, and so forth) as well as risk factors (such as growth, inflation, and liquidity).

• The main inputs—beyond discretionary views—for investors to judge expected returns are (1) historical performance, (2) theories, and (3) forward-looking indicators. A better understanding of these inputs and a better balance among them is needed.

• Well-known evidence of historical asset returns include the significant long-run outperformance of stocks over bonds (less so in the 19th and 21st century than in the 20th century) as well as more moderate rewards for bearing interest rate risk and credit risk.

• Less familiar historical findings include the pervasive success of value, carry, and momentum strategy styles in several markets as well as the tenuous relation between volatility and average returns. This book highlights the low long-run returns of the most volatile assets within each asset class, a finding that may reflect ...