Estimating Expected Returns

25 Pages Posted: 2 Oct 2002

See all articles by Thomas K. Philips

Thomas K. Philips

NYU Tandon School of Engineering - Department of Finance and Risk Engineering

Abstract

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 [2001] 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

Philips, Thomas K., Estimating Expected Returns. Journal of Investing, Forthcoming. Available at SSRN: https://ssrn.com/abstract=327300 or http://dx.doi.org/10.2139/ssrn.327300

Thomas K. Philips (Contact Author)

NYU Tandon School of Engineering - Department of Finance and Risk Engineering ( email )

Brooklyn, NY 11201
United States

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