I can't figure out how the expected market return is calculated. I understand it's function in CAPM and in determining beta. But I don't see how any value for expected market return, market covariance with your stock, or variance of the market, that you're given is reliable.
Has someone ever calculated the expected return for each asset available, the SD for each asset, or correlation between every pair of assets?
To me this seems like the #1 flaw of CAPM because subjective probabilities are needed to even generate variance!!!
Sorry I've been studying for CFA recently.
Pretty sure you can just use an index as a proxy for the market return. I.e the S&P
Of course its been done in case studies, but for practical purposes usually an index is just used as a proxy as mentioned above.
And no, the number 1 flaw of the CAPM is not that there is no good way to get the market return, the number 1 flaw is generally accepted to be that it relies ONLY on the market return and the risk on that return to determine the expected return on a stock.
Isn't that what ICAPM and Fama-French correct for though?
Of course, that's what put Fama French in business in the first place, the fact that market risk alone could be shown to be dominated by other risk factors in multi-factor regressions on stock returns. Something CAPM, by itself, can't compensate for.
www.analystforum.com
Where do you get capital market expectations (expected returns for asset classes like US Large Cap, Intl Emerging, ect.) (Originally Posted: 02/21/2013)
Are there any other good free sources aside from the JP Morgan data? If you're not familiar with that, http://www.jpmorganinstitutional.com/pages/JPMorgan/am/ia/research_and_…
JP Morgan's is the most detailed that I've found that's free to download, with expected returns and standard deviations for a wide spectrum of US and international equities, fixed income, and various alts. I'm curious if there are other resources out there for free; Google didn't get me a whole lot. We have access to Cambridge and Neuberger Berman's data (not sure if it's free or not--I was given it by the firm); anything else like that out there that you can get? Wells Fargo put bits and pieces of their data out there but I couldn't find the whole thing.
JPM is good, so is ms. just keep reading JPM guide to the markets and listen to david kellys con calls if you have access to it, that's all you need.
GMO puts out their 7 Year Forecasts if you register on their website, they cover the main asset classes but don't cover as many as JPM
Expected Market Return - Industry Specific (Originally Posted: 05/29/2014)
For the CAPM model why don't people use the industry specific expected CAGR?
For example instead of using the general S&P 500, use technology industry beta, CAGR when you're evaluating a technology stock
Are you just posting your homework questions?
No lol. I'm an intern
Expected Return In The Market (Originally Posted: 04/27/2013)
I'm working on a project for a personal finance course and the professor has instructed us to assume in our models that we can earn 7% yearly in the market. I know that historically the S&P has averaged around a 7% yearly increase, but this seems pretty high considering capital gains taxes and brokerage fees, assuming that you will have someone managing your money for you.
So in your opinions and from personal experiences, what is a reasonable average return you can expect to earn in the market each year after you subtract the fees and taxes, assuming your portfolio is moderate risk?
7% is reasonable if u buy spy after accounting for dividends
If you want to be a keener, you can calculate the risk premium by calculating the returns of the S&P 500 for as much data as you collect, do the same thing for the US 10 year.
Geometric Average of S&P500 returns - Geometric Average of US 10 Year = risk premium.
Most academics say to use (in the neighborhood) of 9.8% as expected return in the risk premium equation. As said above, you could calculate this on your own by aggregating as much return data as possible and then finding geometric avg. return.
Minimize costs via index fund. Minimize taxes via index fund. Receive the stock market average of 6.8% or some would argue >9% based on most rolling 30 year since the Great Depression.
Market expectation of bond prices (Originally Posted: 06/25/2013)
Trying to get into bonds more and 2 related questions here:
1) I had to interpolate maturities not on the Treasury website, for example 11 year Treasury. Right now the yield curve is not that smooth and I pretty much see 3 different segments: sharp rise 0-10. levels off 11-20, and then 21-30 year maturities. When I calculated implied forward Treasury rates sometimes I get inverted curves. For example, the 6yr rate 5 years from today is actually lower than the 5yr rate 5 years from today. How should I interpret this "market expectation"?
2) Is there such thing as "implied forward bond prices"? I can easily convert spot Treasury rates into forward rates, but can I do the same with current bond yields, and if I can is this the market expectation then? For example can I estimate what the market expects a 10yr A+ corporate bond price to be 3 years from today?
Thanks.
Thanks for your help in advance.
You're wading into the deep end here...
1) Apart from the various short-term effects that flows (such as ones we've had recently) can have on the curve, the shape is not just a function of the expectations of rates. More specifically, the further out you go, the larger the effect of convexity. In general, for the best explanation of the theory of this all you should refer to Antti Ilmanen's series of papers titled "Understanding the Yield Curve". There are also a LOT of technical issues that you may or may not be running afoul of when constructing these forwards. If you want to go into the gory details, let me know.
2) In theory, yes. In practice, not only is this some sort of a risk-neutral expected rate that you're getting, but actually getting it properly is a real pain.
Help! CAPM question (Originally Posted: 01/13/2014)
How do people go about calculating the Expected market return component of the CAPM? Is it a forecast of expected returns of an index such as the S&P 500?
I'm an undergrad so that's why my question sounds noobish
Historical, not forecast.
Long-term market risk premiums have hovered around 4% for the US, and 3.5% international. A lot of time this is forecasted in the manner you described.
http://www.investopedia.com/terms/m/marketriskpremium.asp
The homie Damodaran calculates an implied equity risk premium
+1
WHERES WALLIS STRING? WHERE DA FUCK IS WALLIS?
Nisi voluptas cum excepturi sed fugiat autem id. Similique quo exercitationem consectetur et possimus inventore aspernatur nulla. Alias vel pariatur odit non minima. Provident dolorum recusandae molestiae soluta iste doloremque. Rerum nobis pariatur dolorem. Dolores odit omnis vel culpa et laborum quas.
Nihil ratione qui ipsum et. Aperiam incidunt voluptatem aspernatur. Ea ut doloribus non assumenda totam odit quidem. Fuga quia quibusdam laboriosam quis omnis quia.
Repudiandae ut necessitatibus doloribus dignissimos ipsum nam. Sequi eos non perspiciatis aut qui asperiores eius. Laborum possimus voluptas doloribus inventore dicta. Perferendis inventore rem est alias. Dolores magnam minima dolorem. Asperiores dolorum rem error quaerat aut assumenda voluptatibus.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...
Cumque culpa aut nam nisi omnis itaque. Reprehenderit deserunt quaerat aliquam libero voluptas praesentium doloremque. Dolor quaerat qui fuga quia fuga. Blanditiis in repellat commodi voluptate delectus vel quos. Deleniti inventore voluptatem aperiam eos. Commodi facilis perferendis cumque vel et aut.
Vel ratione vel accusantium harum et aut ea provident. Omnis maiores et consequatur consequatur culpa et qui. Ut qui beatae debitis et quisquam sit. Est praesentium eos voluptas asperiores consequuntur. Facere tempora magni ea et eius quam et sint. Quis architecto dolorem sunt cumque. Consequuntur possimus consequatur odit et.
Doloribus neque reprehenderit optio qui et. Aliquam maiores occaecati eum odit nihil. Eveniet corrupti adipisci non et. Laboriosam hic maxime quasi voluptatem est et accusamus. Consequatur incidunt consequatur illo modi fugiat nostrum. Est omnis odit praesentium nostrum omnis autem.
Velit autem repellendus aut impedit. Unde iusto inventore quos. Animi voluptas ullam unde voluptatem.