I was asked this on an interview and wasn't sure how to respond. can anyone help me? I'm wondering when it's reasonable for past returns to continue into the future. Thanks guys!
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Not sure I understand the question, but almost never would be a pretty good guess.
There's never a case where we would assume past returns of, say 4% will continue into the future?
I can't, but he first asked me why it was unreasonable to expect a 4% return continued into the future, and then after I answered with that, he went and asked when it might be reasonable to expect a 4% return to continue into the future, so I was lost haha
A 4% return on what?
Investment in the S&P 500.
The closest I can come up with is a fixed annuity that makes payments for life. The assumptions then need to be that you'll live forever or the future stops when you die....but perhaps that's a bit too existential for a finance interview.
What job were you applying for?
What about a US Bond that returns 0.1%? Isn't that kind of certain it will return that amount for a set number of years?
dude, you're questions is so broad and ambiguous that it is very hard to answer.
Short answer, yes you can continue to assume that returns that we have seen in the past are achievable in the future.
I agree with you that it's a poorly worded question. Example: the market was up 1% yesterday....is that repeatable? Yes, on some days; absolutely not for every day into the future. What time frame are we even talking about?
If the bond market returned 8% historically with a 5% coupon you have to assume rates will decline at an increasing rate to get the same 8% return. Eventually rates hit zero and that stops.
Bottom line: terrible question.
A bond with a 4% annual coupon?
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