Market Returns Are Estimated with Error. How Much Error?

33 Pages Posted: 24 Jul 2023

See all articles by Edward F. McQuarrie

Edward F. McQuarrie

Santa Clara University - Leavey School of Business

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

McQuarrie, Edward F., Market Returns Are Estimated with Error. How Much Error? (July 14, 2023). Available at SSRN: https://ssrn.com/abstract=4510456 or http://dx.doi.org/10.2139/ssrn.4510456

Edward F. McQuarrie (Contact Author)

Santa Clara University - Leavey School of Business ( email )

500 El Camino Real
Santa Clara, CA California 95053
United States

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