# Questions tagged [expected-return]

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### What should happen to the equity risk premium as rates change?

Suppose I set forward-looking expected returns for capital markets using a dividend discount model framework, under which expected return for equities is the sum of dividend yield, expected trend ...
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### Should the targeted rate of return stay the same regardless of the currency?

I work for a european company which invests mostly in the euro zone but also in the UK. I'm in charge with calculating the hurdle rate targeted for these investments. The internal guidelines are for ...
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### Options trade - statistically expected return calculation?

I am calculating expected return for composite option strategies based on event probabilities provided by the broker. For example, consider the following spread On the left hand side we see: maximal ...
108 views

### How to calculate the expected stock returns for an individual stock?

I know about CAPM. My question is if this method is also viable: Calculate monthly logReturns ...
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### Deriving Single Index Model (Market Model)

is the return of the stock of observation is the return of the reference market is the regression coefficient between the observed stock and the reference market is the regression intercept between ...
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### Mean-variance portfolio optimization: methods for superior estimates of returns

Leaving aside the aspects related to the estimation of the variance component (all the latest techniques to compute a stable covariance matrix of a given set of assets such as simple shrinkage, Ledoit-...
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### Calculate best share based on return of investement and standard devation (Without risk free rate)

I have a microeconomics task in investment analysis. How do you pick the best share based on return of investment and standard deviations? The task is like this: 3 shares: Share A: 10% ROI & 20% ...
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### Mean-variance maximization

I denote by $W_0$ and $W_1$ the wealth of an investor at $t=0$ and $t=1$, respectively. Let $r_f$ be the risk free rate, $r$ the vector of returns of the risky assets in excess of the risk free rate, ...
150 views

### How to perform cross-sectional asset pricing regression?

I'm wondering is that possible to get insignificant beta estimates in the time-series context, but highly significant risk premium associated with that beta in the cross-sectional regression? Any ...
34 views

### Investment evaluation benchmarks

I am writing software to aid in the evaluation of investment projects. Specifically, property based as a first step. I know about NPV and IRR and IRR feels like the best measure. So it gives me a ...
53 views

### Is it possible to calculate the equity required (or expected) return using Black-Scholes option pricing model?

I know the method of calculating the equity value as a European call option (using Black-scholes formula). My question is: Is it possible to calculate the expected (or required) return of equity when ...
43 views

### Are the explanatory factors for a firm's expected returns and its expected earnings/valuation multiples the same?

For example, the 3 factor Fama French model explains much of the cross-sectional variation in equity returns. Would these same 3 factors also explain the cross sectional variation in earnings/EV to ...
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### Black Litterman - numerical instability

I am trying to work out the formula for the posterior mean in Black Litterman's model assuming 100% confidence : Ref: https://corporate.morningstar.com/ib/documents/MethodologyDocuments/IBBAssociates/...
141 views

### Intuitive explanation of geometric mean

Suppose that the 10 Year Treasury Yield Rate varies every trading day during the year X1 (which in practice is accurate) what is the intuitive explanation behind calculating the geometric mean using ...
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### How do you interpret a positive portfolio weight (when using CAPM and CML to calculate efficient portfolios)

I am asked to solve the following homework question: Risk free rate: 2% Expected excess return on market portfolio: 8% Standard deviation of market portfolio: 20% The efficient portfolio has the ...
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### Returns on actively trading bonds compared to equity?

Long term equities outperform bonds (equity premium puzzle). However this kind of misses the nature of returns: in equity it is mostly the total return from "the principal" (and a little from ...
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### Why should we care if the “squares of returns are independently distributed over time” to choose an adequate model of the distribution of returns?

In a Time Series Book by Hashem Pesaran, he mentions that there are a number of issues that need to be addressed in order to choose an adequate model for predicting asset returns. I understand the ...
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### Derivation of arithmetic variation of a portfolio over multiple periods [closed]

I am very confused on how to derive the attached equation (15). Would someone be kind enough to walk me through the proof?
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### Questions on continuously compounded return vs long term expected return

I have reading a paper from Oliver Grandville on long term expected return. I am trying to reconcile what I am reading in that paper vs what I see under "Application to Stock Market" in Kelly ...
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### Proof of the convexity adjustment formula

Let $y_0$ be the forward bond yield observed today for a forward contract with maturity $T$, $y_T$ be the bond yield at time $T$, $B_T$ be the price of the bond at time $T$ and let $\sigma_y$ be the ...
116 views

### How to calculate daily return including fees?

I have a trading strategy that closes one position on an asset and open a new position on a different asset every day at noon. No more than one position is open at a single time. Assets are crypto ...
289 views

### Interpretation of Excess Return

How is excess return defined for a given asset? There are altogether two different definitions for excess return used in the calculation of alpha and beta and I'm unable to understand which one ...
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### Explain Four Basic Axioms of Maximising Expected Utility

I begin learn PRM , Someone help me understand Four Basic Axioms of Maximising Expected Utility most intuitive way .Thank you very much
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### Understanding CAPM, CML, and efficient portfolios

I'm trying to understand the CAPM model and how we can use it to understand efficient portfolios. Specfically, I'm trying to use the CML line (mapping expected returns and standard deviations of ...
497 views

### Intuitive explanation of stochastic portfolio theory

Fernholz and Karatzas have published various papers about so called stochastic portfolio theory. Basically they say that the return to be expected from a portfolio on the long run is rather the ...
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### Why the expected return rate of a stock has nothing to do with its option price?

OK, I admit that this is a frequently asked question. But I couldn't find a satisfying answer after I read the explanations of books, went through the derivations of B-S formula, and searched answers ...
465 views

### What is an appropriate algorithm to use for tax loss harvesting?

I've been reading into how Betterment and Wealthfront have architected their tax loss harvesting algorithms, but they stop short of providing any real examples. Essentially, they both reduce to: <...
238 views

### Has automated trading produced profits at IEX?

Is there evidence that automated trading is profitable on the latency-enforced portion of the exchange? On the one hand, if automated trading was profitable when these limits existed naturally, it ...
241 views

### Computing the minimum variance portfolio

Given two risky assets and their corresponding covariance matrix, how do I compute the global minimum variance portfolio, its standard deviation and its expected return?
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### 2 stocks, no shorting vs shorting. (concrete questions, mean-variance)

I'd appreciate help with the following questions. Suppose there are two stocks $A$ and $B$ with expected returns $E_A, E_B >0$ and volatilities $v_A, v_B >0$, respectively . Also, suppose ...
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### Characterizing relation “ has no less information than” between information systems represented by Markovian matrices

I crossposted this question on math.stackexchange. Background: Suppose that an investor's utility is both determined by the state and her action taken. A fact of life is that she can't observe the ...
546 views

### Call option on a Mutual Fund

I am trying to price a call option on a mutual fund. Given the lack of market implied data, I am going to estimate the fund´s expected volatility using as a reference its historical volatility (...