The Misuse of Expected Returns

Posted: 22 Dec 2006

See all articles by Michael J. Stutzer

Michael J. Stutzer

University of Colorado at Boulder - Leeds School of Business

Chris Yung

University of Virginia - McIntire School of Commerce

Eric N. Hughson

Claremont McKenna College - Robert Day School of Economics and Finance

Abstract

Much textbook emphasis is placed on the mathematical notion of expected return and its historical estimate via an arithmetic average of past returns. But those wanting to forecast a typical future cumulative return should be more interested in estimating the median future cumulative return than in estimating the mathematical expected cumulative return. For that purpose, continuous compounding of the mathematical expected log gross return is more relevant than ordinary compounding of the mathematical expected gross return.

Keywords: Investment Theory, Portfolio Theory, Equity Investments, Fundamental Analysis and Valuation Models, Portfolio Management, Portfolio Construction, Rebalancing, and Implementation

Suggested Citation

Stutzer, Michael Jay and Yung, Chris and Hughson, Eric N., The Misuse of Expected Returns. Financial Analysts Journal, Vol. 62, No. 6, pp. 88-96, November/December 2006. Available at SSRN: https://ssrn.com/abstract=953068

Michael Jay Stutzer

University of Colorado at Boulder - Leeds School of Business ( email )

Boulder, CO 80309-0419
United States

Chris Yung

University of Virginia - McIntire School of Commerce ( email )

P.O. Box 400173
Charlottesville, VA 22904-4173
United States
434-242-0836 (Phone)

Eric N. Hughson (Contact Author)

Claremont McKenna College - Robert Day School of Economics and Finance ( email )

500 E. Ninth St.
Claremont, CA 91711-6420
United States
909-607-3664 (Phone)

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