When can we assume returns will continue into the future?

11y

Not sure I understand the question, but almost never would be a pretty good guess.

Johnny1000

11y

There's never a case where we would assume past returns of, say 4% will continue into the future?

11y

Johnny1000:
There's never a case where we would assume past returns of, say 4% will continue into the future?

To what are you referring? Can you give an example of a security or asset class that returned some return for ten years and then had the exact same return the following ten years? I don't know of any.

Johnny1000

11y

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

11y

A 4% return on what?

Johnny1000

11y

Investment in the S&P 500.

11y

Johnny1000:
Investment in the S&P 500.

Is it possible he meant terminal growth rate of earnings/cash flow? Either I don't get it or the answer is 'never' as to when you can expect 4% per year in the stock market "in the future".

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?

Johnny1000

11y

SirTradesaLot:
Johnny1000:
Investment in the S&P 500.
Is it possible he meant terminal growth rate of earnings/cash flow? Either I don't get it or the answer is 'never' as to when you can expect 4% per year in the stock market "in the future".
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?

Unforseen

11y

Johnny1000:
SirTradesaLot:
Johnny1000:
Investment in the S&P 500.
Is it possible he meant terminal growth rate of earnings/cash flow? Either I don't get it or the answer is 'never' as to when you can expect 4% per year in the stock market "in the future".
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.

Check out my Blog

11y

Best Response

Unforseen:
Johnny1000:
SirTradesaLot:
Johnny1000:
Investment in the S&P 500.
Is it possible he meant terminal growth rate of earnings/cash flow? Either I don't get it or the answer is 'never' as to when you can expect 4% per year in the stock market "in the future".
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.

LHDan

11y

A bond with a 4% annual coupon?

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Unforseen

11y

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