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

Part II

A dozen case studies

Assets

8. Equity risk premium

9. Bond risk premium

10. Credit risk premium

11. Alternative asset premia

Dynamic strategy styles

12. Value-oriented equity selection

13. Currency carry

14. Commodity momentum and trend following

15. Volatility selling (on equity indices)

Underlying risk factors

16. Growth factor and growth premium

17. Inflation factor and inflation premium

18. Liquidity factor and illiquidity premium

19. Tail risks (volatility, correlation, skewness)

We now get to the meat of this book: return sources. Returns can be viewed from many angles—which asset classes earn them, what active strategy types deliver them, what fundamental factors explain them. In the dozen case chapters that follow, I present all three complementary angles. All reasonably static asset classes and dynamic strategies may reflect certain underlying risk factors. Beyond rational risk factors—such as growth, inflation, liquidity, and volatility—related investor irrationalities and supply–demand considerations can influence the prospective returns of both asset classes and dynamic strategies.

The cube of asset, style, and factor perspectives that was introduced in Chapter 1 will be used as a navigational tool at the beginning of each chapter.

The boundaries between these three types of return sources are fuzzy. This book stresses that investors could be better off focusing on underlying factors rather than on asset classes when considering investment risks and returns. Each asset ...