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Questions tagged [expected-return]

The tag has no usage guidance.

2
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1answer
66 views

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, ...
6
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1answer
124 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 ...
0
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0answers
30 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 ...
2
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1answer
51 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 ...
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0answers
41 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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0answers
90 views

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/...
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2answers
95 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 ...
0
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1answer
128 views

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 ...
0
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1answer
50 views

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 ...
1
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1answer
97 views

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 ...
-4
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1answer
92 views

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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2answers
171 views

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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0answers
37 views

Variance Equations is missing definition

here: https://www.nrc.gov/docs/ML1208/ML12088A329.pdf Campbell, Lo, Mackinlay: The Econometrics of Financial Markets on page 159 i am looking at equation 4.4.9 in the last line, = $I\sigma_{\...
4
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2answers
675 views

What are the assumptions in the first-stage of Fama-MacBeth (1973)?

According to the CAPM, the expected return of asset $i$ is: $E(Z_i) = \beta_{im} E(Z_m)$ where $Z_m$ is the excess return on the market portfolio, and $Z_i$ is the excess return of asset $i$ over ...
2
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1answer
106 views

How can risk-neutral pricing find the right price for securities if it doesn't account for risk premia?

I'm confused as to how a method that values securities purely on their expected return works in the real world if it doesn't take into account the fact that investors demand a higher return for ...
0
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1answer
101 views

Get expected joint-payoff price of digital options from individual payoffs

I am trying to model a joint distribution $f(X_1,X_2)$ (where $X_1$ and $X_2$ are market prices of the options) and then find from it the value of joint payoff price: $F(X_1, X_2; B_1, B_2) = E[ ...
1
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1answer
666 views

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 ...
0
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1answer
104 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 ...
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2answers
234 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 ...
1
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1answer
690 views

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
3
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1answer
171 views

Expected option return in MATLAB

The expected return of an option is given by its expected payoff under $P$ over its market price under $Q$. For the Black-Scholes model, expected call option return is given as (see here): $$ E(R)=\...
1
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1answer
58 views

Implied Expected Stock Return from European Option Prices

We can calculate the expected stock return (under the measure $Q$) from at-the-money ($K=S_t$) option prices as: $$E\left(\frac{S_T-S_t}{S_t}\right)=\frac{e^{rT}}{S_t}(C_t-P_t)$$ The result is ...
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0answers
38 views

Polynomial interpolation of corrected lognormal distribution

Can anyone provide a formula for a polynomial interpolation of the corrected lognormal distribution used to model returns traditionally resulting from the wrong Brownian motion generated model? ...
7
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3answers
222 views

Where to find good notations to teach investment portfolio maths?

I don't know whether this question is in order here. I do a bit of teaching and I am preparing my own notes but I thought that his should not be necessary. In which book/pdf on the web can we find a ...
0
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1answer
44 views

Which rate of return to use in portfolio weight estimation?

I am learning the basics of portfolio management. I am confused about different ways to calculate rate of returns mentioned in the text investment and portfolio analysis. There are three methods to ...
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0answers
62 views

Calculating expected annual returns [closed]

An economy contains these three assets: Asset A has standard deviation of returns (per annum) of 25% and market capitalisation $600m Asset B has standard deviation of 20%, market capitalisation $...
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0answers
182 views

Cross-sectional Regression: Using calculated coefficient of first regression for a second regression as dependent variable

Hello stackexchange community! I am new to R and econometrics and and stuck in a step of the fama-macbeth (1973) regression, in which risk premia of stocks are estimated with a two-step regression ...
0
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1answer
66 views

how to find the weights in a portfolio? [closed]

Compute the weights in a portfolio consisting of two kinds of stocks if the expected return on the portfolio is to be $E(K_v)=10\%$, given the following information on the returns on stock 1 and 2: $$ ...
2
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1answer
318 views

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 ...
7
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2answers
457 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 ...
1
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1answer
344 views

Differences between dummy regression event study and regression on residuals from market model

I have two different event study approaches and I wonder if the results are exactly the same. Model 1 applies a dummy regression market model: (1) $R_{t}=\beta_{0} + \beta_{1}R_{mt}+\beta_{2}D_{t}+\...
0
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1answer
484 views

Is it OK to consider the expected return is zero for stocks when calculating VaR over a short horizon?

I want to implement the approach described in the following recipe for calculating VaR: Is there a step-by-step guide for calculating portfolio VaR using monte carlo simulations I was told that I can ...
2
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1answer
31 views

Distress firms and cross section returns

In George and Hwang's 2010 JFE paper, they are trying to resolve the so called distress risk and leverage puzzles. This is their explanation: This is a puzzle because high distress intensity or ...
2
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1answer
274 views

Delta derivation from the expectation

I'm trying to understand the following transformation leading to Delta $\frac{dC}{dx} = e^{-r\tau} \mathbb{E}[ \frac{\partial}{\partial x}\text{max}(xY-K,0)] = e^{-r\tau} \mathbb{E}[Y \textbf{1}(xY&...
9
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9answers
5k views

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 ...
1
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1answer
436 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: <...
0
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2answers
232 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 ...
2
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1answer
212 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?
2
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2answers
233 views

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 ...
3
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0answers
45 views

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 ...
3
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1answer
525 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 (...
3
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0answers
321 views

Correlation between idiosyncratic residuals and forward returns

The classic mean-reversion strategy is to calculate an "expected return" (alpha) by computing the raw return for each security and then remove the part which you think is market driven. Statistically ...
3
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1answer
2k views

How to estimate market integration parameter in Singer-Terhaar model for E(r)?

Singer-Terhaar is part of CFA II and III curriculum. It estimates risk premium for some asset, traded at some local market, as weighted average of expected premiums for the case of (1) local market, ...
12
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1answer
747 views

Portfolios from Sorts

Some time ago Almgren and Chriss proposed a method for portfolio optimization based on sorting criteria such as $r_1 > r_2 >... > r_N$ instead of explicit expected returns: see portfolios ...
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0answers
627 views

what is a reasonable beta in CAPM?

I want to predict expected returns for assets using a CAPM, to calculate unexpected (unpredictable, idiosyncratic, non-systemic) returns in portfolios. My CAPM estimated on monthly total gross ...
9
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2answers
209 views

St Petersburg lottery pricing & short investing horizons

I am a statistician (no solid background in finance). Please forward me to a book \ chapter \ paper to resolve the following general question. Suppose we have a stock with the following monthly return ...
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0answers
47 views

Inferring Returns From Minimal Data Points [duplicate]

Possible Duplicate: How much data is needed to validate a short-horizon trading strategy? Suppose I have daily returns for a trading strategy against one month of data. Before starting trading on ...
12
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3answers
1k views

What is the expected return I should use for the momentum strategy in MV optimization framework?

As all research on the momentum strategies are focused on the indicator, i.e. the entry point, there seems not much discussion on its expected return? Though there are some discussions on the exit ...
3
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3answers
2k views

How to model the daily return using intraday data?

Say, I have hourly returns $r_1,r_2,...,r_T$, where $r_t$ = $ln(p_t)$ - $ln(p_0)$ for $t = 1...T$. So what is the value of $E[r_t]$? Would $r_T$ be the $\prod{(r_t)}$? Basically $r_t$s are the ...
9
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1answer
3k views

How to apply the Kelly criterion when expected return may be negative?

My concern is how to handle a negative value for the Kelly formula. Even when you have a system that has positive expectancy, you can (and usually will) sustain a number of losses, sometimes ...