Estimating Expected Returns
25 Pages Posted: 2 Oct 2002
I present simple estimators for the expected returns of stocks and bonds and compare them to the standard historical, or sample mean, estimator. I show that as a result of a capital gains constraint that stocks and bonds must satisfy, the historical estimator can be acutely biased. I further show that an estimator for the expected return of stocks derived from the Edwards-Bell-Ohlson equation yields unbiased estimates that are useful in practice. Finally, I estimate the equity risk premium and show that it is positive, contradicting Arnott and Ryan's  claim that it is negative.
Keywords: estimator, sample mean, expected return, Equity Risk Premium, EBO, ERP
JEL Classification: G12, A10, C13, E17, E44
Suggested Citation: Suggested Citation