Fixed Income Attribution

Question

Q: In the passage below, is the implied forward rates (expect return) considered the same as the market implied return from forward rates (unexpected return)?

For instance,

• Expected return = Implied forward rate
• Unexpected return = The actual realized return minus the market implied return from forward rates

Therefore, actual realized return = expected return + unexpected return.

Here is a section from Managing Investment Portfolios: A Dynamic Process edited by John L. Maginn, part of the CFA Curricuum (page 764)

Am I correct to consider these two bold words to be the same?

Answer 1

Yes, I believe the same thing is being referred with different words. First the author uses "the implied forward rates", later he uses "the market implied return from the forward rates", but he is describing the same thing. It is described briefly the first time and with more detail the second time (which is unusual, people most often do the reverse).

However the words "(the expected return)" and "(the unexpected return") are not referring to the same thing and should not be in yellow. "(the expected return)" refers to the thing mentioned while "(the unexpected return") refers to the difference betwen the actual realized return and the thing mentioned.

Therefore, the equation you wrote is correct:

actual realized return = expected return + unexpected return