Skip to main content

Questions tagged [expected-return]

The tag has no usage guidance.

Filter by
Sorted by
Tagged with
0 votes
1 answer
39 views

Expected daily range (SPX) and daily realized range

I'm new in quant math, I'm self-studying it. I have two question in exp. daily range topic. How can we make the possibly most accurate estimation for expected daily ranges? My idea was to take data ...
0 votes
1 answer
79 views

Excess Return Covariance Matrix is Singular - Cash return and risk free rate are the same [closed]

I've created a three asset excess return covariance matrix. The assets are; equity, bonds, and cash. However, my cash return is the same as my risk free rate ( i.e. 3 month Euribor). This is leaving ...
0 votes
1 answer
55 views

Possibility of obtaining a positive mathematical expectation in a quoted currency

There is a currency pair C/USD = 1. C - currency in which I want to invest in order to make a profit in USD. Suppose its price changes discretely: 50% - increases by 20%, 50% - decreases by 20%. This ...
4 votes
0 answers
96 views

How is option pricing related to the correlation between implied volatlity and the underlying?

The correlation between the index returns (e.g SPX) and its changes in option-impled volatility (e.g. VIX), is strong, stable and negative (the implied volatility feedback effect). To me at least, it ...
0 votes
0 answers
20 views

Find expected rate of return without drift based on ito process

I would like to know how to solve question (ii), I know it is a cash-or-nothing option but I have no idea how to get the expected rate of return even I use put-call parity. Could anybody guide me I ...
1 vote
2 answers
277 views

Return forecasting for portfolio optimization

I have some questions related to forecasting returns and how it's used to generate the inputs for portfolio optimization. First, I want to understand why factor models such as FF- 3-factor model are ...
0 votes
0 answers
53 views

Power-utility function for calculating Certainty equivalent

I have a question regarding how i should calculate 3.2-3.4, currently studying for an exam. What i don't get is how to acctually derive the certainty equivalent from the expected utility of gross ...
0 votes
0 answers
69 views

Determine expected geometric return from Sharpe ratio

I'm trying to calculate the expected annual geometric return, given that I'm provided with an annual Sharpe ratio (0.5), the yield on a 3-month T-Bill (5%) (using this yield as a proxy for the risk-...
0 votes
0 answers
80 views

If investors are risk-neutral, should the (equity) risk premium be zero?

I looked up ChatGPT and they stated that the (equity) risk premium should be zero for a risk-neutral world. The definition of a risk-neutral investor is that one is indifferent between additional or ...
2 votes
2 answers
446 views

Why are long 2 year Treasury futures (ZT) trading at negative carry?

The 2 year Treasury note yields ~4.9% in the cash market as of 29 Aug 2023. Assume implied cost of financing of 5.5% pa (3 month T-bill rate) to finance a long futures position. This results in a ...
0 votes
0 answers
76 views

Multiple models for one single wallet

I am an algorithm day trader. I am trying to automate certain patterns on the stock markets. Here is my question. Suppose I have $n$ models $M_1, M_2, M_3, \dots, M_n$ with expected return $E_1, E_2, ...
1 vote
1 answer
101 views

Fama French Factor adjusted returns

I want to understand the extent to which portfolio performance can be explained by the three Fama French Factor model. I use the following approach: Regress the portfolio's excess returns against the ...
2 votes
1 answer
220 views

Trying to understand the notion of required return

I have been thinking about the notion of required return lately. I am not familiar with a formal definition, but I have tried to reason my way towards one. Please let me know if my approach makes ...
1 vote
0 answers
73 views

Issue in Fama-French 3 factors Model

I hope you are doing well. As part of my thesis, I built 12 portfolios of 200 randomly selected stocks. I now want to calculate the Bs of the 3 Fama French factors for each stock, so that I can ...
2 votes
0 answers
115 views

Does the expected return increase with variance for stocks? [duplicate]

I took a historical dataset of ~2600 stocks and computed the 30-day returns for non-overlapping windows, for a 9 year period. For the returns, I computed the mean and variance. Then I plotted the mean ...
0 votes
1 answer
95 views

Monthly and annual arithmetic mean in valuations? [closed]

I know this is back to basics but I am perplexed by it!!! Assume that the future value (FV) of an investment at the end of year 1 is 112, the annual arithmetic expected return is 12%, hence the ...
0 votes
1 answer
162 views

Simple (?) question about expected bond returns

Newbie here. I should say upfront that I'm not a quant, just someone trying to broaden his knowledge of fixed income investing. I apologise in advance if I'm mangling some terminology. Imagine a ...
1 vote
0 answers
50 views

Which investment do you choose? Same expected return but differing variances and correlation [closed]

Let's say you have two investments, A and B. Both A and B have the same expected return. However A has low variance and is not correlated with any other investments. Whereas B has high variance and ...
0 votes
2 answers
285 views

Detrending market data to calculate expected return (ER)

I'm a complete newbie so please be kind. I'm reading Evidence-Based Technical Analysis: Applying the Scientific Method and Statistical Inference to Trading Signals by David Aronson And I'm ...
17 votes
9 answers
10k 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 ...
7 votes
2 answers
281 views

Do all risky assets have negative expected return over long enough time horizons?

I stumbled across a site that claims "given a long enough forecast horizon H, all assets with positive volatility have an unbiased expected return that is negative". They base this on the ...
0 votes
1 answer
49 views

Combining discontinuous opposing returns into a single continuous function

See the function here. It's my intent to measure the expected log return of the optimal trade with regards to long/short positions in a trading range. The trading range has an equilibrium where the ...
2 votes
1 answer
107 views

relation between risk averson coefficient and maximum Sharp ratio in Black-Litterman context

BL model compute the implied returns based on the reverse optimization where the objective is: $${\underbrace U_{{\rm{investor's \ risk \ utility}}} \buildrel \Delta \over = {\bf{w}}_M^T{\bf{\Pi }} - \...
3 votes
1 answer
267 views

Trading a Bouncy Stock

I came across the following question and am trying to understand it better. I was hoping you could share your intuitions. For a given stock, you are certain that for the next 100 days, it will move ...
2 votes
0 answers
93 views

Expected returns and Fama-French Factor Model

It is my understanding that for any given stock, the sample mean of historical returns is not a good proxy for the stock's expected return. In fact, the return on a stock needs to be estimated via ...
1 vote
1 answer
76 views

Measuring extra return investors demand for a stock which cannot be sold?

How to roughly measure how much premium investors would demand if a stock could not be sold and its investors had to stick with it permanently using just dividends not capital gain as return? I am not ...
2 votes
0 answers
126 views

A Bayesian-Stein based expected return estimator by J.P. Morgan

Please consider the following estimator for the expected returns specified in the paper "Improving on risk parity: Hedging forecast uncertainty" by Peter Rappoport, J.P. Morgan, October 2012....
2 votes
0 answers
99 views

Are there any studies on the link between energy markets and hedging-strategies for Cryptocurrency mining?

Full Disclaimer: I first asked this question on Bitcoin.SE, however I feel like my question is more relevant to this site as there would be wider knowledge and insight of some better sources or ...
0 votes
2 answers
66 views

Should diverging valuation multiples affect beta estimate?

Suppose we experience a significant equity market crash. All equities are affected, but the drawdown disproportionately affects equities in a specific sector - for example, say the broad equity market ...
1 vote
0 answers
85 views

Calculating CDO pay-off

Background I got a model for the distance-to-default of an instution in a system of banks from the paper "An SPDE model for systemic risk with endogeneous contagion". Therein they postulated ...
4 votes
1 answer
319 views

Measuring expected returns

Most papers in the literature measure expected returns using the simple average of past returns. Why is this? When is it more correct to use geometric returns instead? Any good references? I know that ...
2 votes
1 answer
878 views

T-statistics on monthly returns vs annualized monthly returns

eqI am very confused about a very basic question. This is probably more statistics than quantitative finance, but still, should be useful for this stackexchange board as well. Let's assume I have ...
3 votes
1 answer
522 views

Expected return on Black-Scholes priced option?

Suppose we have a European-style call option on some stock, and it was priced according to Black-Scholes. Everybody agrees on the stock's volatility and expected return. What's the expected return (...
2 votes
1 answer
2k views

Computing the minimum variance portfolio for only two risky assets

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?
1 vote
2 answers
934 views

Standard deviation formula with Short selling- Markowitz model

I have 2 fast quastions. Before I begin I want to show you that I found minus before SD of bills in the book Principles of corporate finance(1.screen). I know SD of bills is zero and minus in this ...
0 votes
0 answers
164 views

Maximum expected return portfolio: Lagrangean derivation of closed-form analytical solution

\begin{align} \arg \min_w \enspace & -w^\top \mu \\ \mathrm{s.t.} \enspace & 1_N^\top w = 1 \\ & w_i \geq 0 \enspace \forall i=1,\dots, N \end{align} is the optimization problem for ...
2 votes
1 answer
917 views

Under Put-Call Parity, why do we add the cost of carry to Call prices but subtract them from the Stock price and Put prices?

In Natenberg (1994) Chapter 11 he outlines the Put-Call parity relationships. ...
0 votes
0 answers
277 views

Deriving Single Index Model (Market Model)

$R_{it}=\alpha_i+\beta_i\cdot R_{mkt}+\epsilon_{it}$ $R_{it}$ is the return of the stock of observation $R_{mkt}$ is the return of the reference market $\beta_i$ is the regression coefficient between ...
4 votes
1 answer
263 views

Methods for superior estimates of returns in m.v. portfolio optimization

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-...
1 vote
1 answer
2k 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 votes
1 answer
125 views

The Education of a Speculator - Gambling the Vig

In his autobiography, The Education Of A Speculator, Victor Niederhoffer gives the following example: "For perspective on why frequent payment of rakes on speculative trades leads to ruin, ...
1 vote
1 answer
312 views

How to calculate IRR between 2 numbers

I want to consider 4 scenarios in google sheets. All deal with a periodic return over n periods Positive to Positive Positive to Negative Negative to Negative ...
1 vote
2 answers
246 views

Are asset return means difficult to predict because they have no lower bound?

In finance, it is widely known that the volatility of asset returns ($\sigma$) are easier to predict than the expected value of asset returns ($\mu$) , otherwise known as the average return or mean. ...
0 votes
3 answers
357 views

Expected returns for scalping futures [closed]

I've been an investor for about 12 years now. My annual return, November 2008 until today, is 25.77% on my stock portfolio, which is heavy on AAPL, BRK.B and recently TSLA. Mostly buy and hold, hardly ...
1 vote
1 answer
49 views

Citation for the definition of Return on Investment

I am writing a paper in an area where the concept of Return on Investment may not be clear. Is there a definitive source for its definition I can cite?
2 votes
1 answer
74 views

Why do surprises in macroeconomic variables average out to zero?

In the book Investments (Bodie, Kane, Marcus), in chapter 8, the authors discuss index models (page 247) and, in its context, systematic risk. The authors state, without explanation, that the market ...
6 votes
2 answers
3k 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 ...
4 votes
1 answer
123 views

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 ...
1 vote
2 answers
47 views

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 ...
3 votes
1 answer
155 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 ...