Estimating Long-Term Expected Returns

41 Pages Posted: 10 Jul 2023

See all articles by Rui Ma

Rui Ma

La Trobe University - La Trobe Business School

Ben R. Marshall

Massey University - School of Economics and Finance

Nhut H. Nguyen

Auckland University of Technology

Nuttawat Visaltanachoti

Massey University - Department of Economics and Finance

Date Written: June 28, 2023

Abstract

Estimating long-term expected returns as accurately as possible is of critical importance. Researchers typically base their estimates on yield and growth, valuation, or a combined yield, growth, and valuation framework. We run a horse race of the abilities of different frameworks and input proxies within each framework to estimate 10- and 20-year out-of-sample returns over 140-year and more recent time periods. Our results indicate that several approaches strongly outperform estimates based on historical mean benchmark returns, with mean square error improvements exceeding 40%. Using these approaches in asset allocation decisions results in an improvement in Sharpe ratios of more than 50%.

Keywords: Long-Term Expected Returns, Asset Allocation

JEL Classification: G11, G12

Suggested Citation

Ma, Rui and Marshall, Ben R. and Nguyen, Nhut H. and Visaltanachoti, Nuttawat, Estimating Long-Term Expected Returns (June 28, 2023). Available at SSRN: https://ssrn.com/abstract=4493448 or http://dx.doi.org/10.2139/ssrn.4493448

Rui Ma (Contact Author)

La Trobe University - La Trobe Business School ( email )

Melbourne, 3086
Australia

Ben R. Marshall

Massey University - School of Economics and Finance ( email )

Private Bag 11-222
Palmerston North, 30974
New Zealand
64 6 350 5799 (Phone)
64 6 350 5651 (Fax)

Nhut H. Nguyen

Auckland University of Technology ( email )

55 Wellesley St East
Auckland, Auckland 1010
New Zealand
+64 9 921 9999 (Phone)

Nuttawat Visaltanachoti

Massey University - Department of Economics and Finance ( email )

School of Economics and Finance
Private Bag 102904, NSMC
Auckland
New Zealand
64 9 414 0800 (43169) (Phone)
64 9 441 8177 (Fax)

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