Market Returns Are Estimated with Error. How Much Error?
33 Pages Posted: 24 Jul 2023
Date Written: July 14, 2023
Abstract
For periods beginning 1926, it is conventional to suppose that historical market returns are known with reasonable accuracy. This paper challenges that comfortable certainty. Multiple indexes of market return are examined to show that return estimates do not closely agree across indexes and are unstable within index over time. The paper concludes that two-decimal precision—to the whole percentage point, with an error band of plus or minus one percentage point—would better reflect the accuracy of historical estimates of annual market return. Implications for evaluating mutual fund performance and back testing investment strategies are considered.
Keywords: S&P 90,S&P 500,CRSP,Wilshire 5000,Russell 3000,total market index,small stock outperformance
JEL Classification: N22,G11,G12
Suggested Citation: Suggested Citation