Assessing Expected Return Proxies for Individual Stocks

Abstract

We examine the relative forecast accuracy of expected returns for individual stocks sourced from analyst target prices, earnings per share estimates, management forecasts, earnings yields, stock yields, historical averages and the random walk model. In doing so, we avoid the use of predictive regressions. The most accurate estimate of the realized time series is provided by consensus (median) target prices, a forecast that has received limited attention empirically. The return proxy is best for approximately 60% of the S&P 500 firms, offering a valuation that is direct and subject to well-defined forecast horizons. Future studies should consider its use.

Keywords: Expected return estimates; Forecast accuracy; Target prices

JEL Classification: D84, G17