This comprehensive reference delivers a toolkit for harvesting market rewards from a wide range of investments. Written by a world-renowned industry expert, the reference discusses how to forecast returns under different parameters. Expected returns of major asset classes, investment strategies, and the effects of underlying risk factors such as growth, inflation, liquidity, and different risk perspectives, are also explained. Judging expected returns requires balancing historical returns with both theoretical considerations and current market conditions. Expected Returns provides extensive empirical evidence, surveys of risk-based and behavioral theories, and practical insights.

Table of Contents:
Foreword by Clifford Asness xi Acknowledgments xvii Abbreviations and acronyms xix Part I Overview, Historical Returns, and Academic Theories 1 1 Introduction 3 1.1 Historical performance 7 1.2 Financial and behavioral theories: A brief history of ideas 9 1.3 Forward-looking indicators 13 1.4 View-based expected returns 15 1.5 General comments about the book 16 1.6 Notes 20 2 Whetting the appetite: Historical averages and forward-looking returns 23 2.1 Historical performance since 1990 24 2.2 Sample-specific results: Dealing with the pitfalls 27 2.3 Forward-looking return indicators 32 2.4 Notes 35 3 The historical record: The past 20 years in a longer perspective 37 3.1 Stocks 39 3.2 Bonds 43 3.3 Real asset investing and active investing 47 3.4 FX and money markets 50 3.5 Real return histories 52 3.6 Notes 52 4 Road map to terminology 57 4.1 Constant or time-varying expected returns? 57 4.2 Rational or irrational expectations formation? 58 4.3 Return measurement issues 59 4.4 Returns in what currency? 60 4.5 Risk-adjusted returns 61 4.6 Biased returns 63 4.7 Notes 63 5 Rational theories on expected return determination 65 5.1 The old world 66 5.2 The new world 68 5.3 Detour: a brief survey of the efficient markets hypothesis 81 5.4 Notes 83 6 Behavioral finance 87 6.1 Limits to arbitrage 87 6.2 Psychology 89 6.3 Applications 98 6.4 Conclusion 106 6.5 Notes 107 7 Alternative interpretations for return predictability 111 7.1 Risk premia or market inefficiency 111 7.2 Data mining and other “mirage'' explanations 112 7.3 Notes 115 Part II A Dozen Case Studies 117 8 Equity risk premium 119 8.1 Introduction and terminology 119 8.2 Theories and the equity premium puzzle 120 8.3 Historical equity premium 122 8.4 Forward-looking (ex ante objective) long-term expected return measures 128 8.5 Survey-based subjective expectations 141 8.6 Tactical forecasting for market timing 144 8.7 Notes 149 9 Bond risk premium 153 9.1 Introduction, terminology, and theories 153 9.2 Historical average returns 157 9.3 Alternative ex ante measures of the BRP 160 9.4 Yield curve steepness: important predictive relations 161 9.5 Explaining BRP behavior: first targets, then four drivers 164 9.6 Tactical forecasting—duration timing 174 9.7 Notes 177 10 Credit risk premium 179 10.1 Introduction, terminology, and theory 179 10.2 Historical average excess returns 183 10.3 Focus on front-end trading—a pocket of attractive reward to risk 188 10.4 Understanding credit spreads and their drivers 191 10.5 Tactical forecasting of corporate bond outperformance 198 10.6 Assessing other non-government debt 199 10.7 Concluding remarks 204 10.8 Notes 205 11 Alternative asset premia 207 11.1 Introduction to alternatives 207 11.2 Real estate 210 11.3 Commodities 219 11.4 Hedge funds 226 11.5 Private equity funds 241 11.6 Notes 245 12 Value-oriented equity selection 249 12.1 Introduction to dynamic strategies 249 12.2 Equity value: introduction and historical performance 251 12.3 Tweaks including style timing 258 12.4 The reasons value works 261 12.5 Does the value strategy work in equities beyond individual stock selection or in market or sector selection in other asset classes? 265 12.6 Relations between value and other indicators for equity selection 267 12.7 Notes 268 13 Currency carry 271 13.1 Introduction 271 13.2 Historical average returns 272 13.3 Improvements/refinements to the baseline carry strategy 276 13.4 Why do carry strategies work? 282 13.5 Carry here, carry there, carry everywhere 288 13.6 Notes 290 14 Commodity momentum and trend following 293 14.1 Introduction 293 14.2 Performance of simple commodity momentum strategies 294 14.3 Tweaks 298 14.4 Why does momentum—such a naive strategy—work? 299 14.5 Momentum in other asset classes 301 14.6 Notes 305 15 Volatility selling (on equity indices) 307 15.1 Introduction 307 15.2 Historical performance of volatility-trading strategies 311 15.3 Tweaks/Refinements 314 15.4 The reasons volatility selling is profitable 315 15.5 Other assets 319 15.6 Notes 319 16 Growth factor and growth premium 321 16.1 Introduction to underlying factors in Chapters 16–19 321 16.2 Introduction to the growth factor 327 16.3 Theory and evidence on growth 328 16.4 Asset market relations 331 16.5 Time-varying growth premium 338 16.6 Notes 338 17 Inflation factor and inflation premium 341 17.1 Introduction 341 17.2 Inflation process—history, determinants, expectations 345 17.3 Inflation sensitivity of major asset classes and the inflation premium 350 17.4 Time-varying inflation premium 356 17.5 Notes 356 18 Liquidity factor and illiquidity premium 359 18.1 Introduction 359 18.2 Factor history: how does liquidity itself vary over time? 362 18.3 Historical evidence on average liquidity-related premia 365 18.4 Time-varying illiquidity premia 370 18.5 Note 374 19 Tail risks (volatility, correlation, skewness) 375 19.1 Introduction 375 19.2 Factor history 378 19.3 Historical evidence on average asset returns vs. volatility and correlation 380 19.4 Theory and evidence on the skewness premium 389 19.5 Verdict on why high-volatility assets fare so poorly 392 19.6 Time-varying premia for tail risk exposures 395 19.7 Notes 396 Part III Back to Broader Themes 399 20 Endogenous return and risk: Feedback effects on expected returns 401 20.1 Feedback loops on the direction of risky assets 401 20.2 Feedback loops on less directional positions 403 20.3 Agenda for market timers and researchers 405 20.4 Notes 407 21 Forward-looking measures of asset returns 409 21.1 Popular value and carry indicators and their pitfalls 410 21.2 Building blocks of expected returns 413 21.3 Notes 416 22 Interpreting carry or non-zero yield spreads 419 22.1 Introduction 419 22.2 Future excess returns or market expectations? 420 22.3 Empirical horse races for various assets 424 22.4 Conclusions 428 22.5 Notes 429 23 Survey-based subjective expected returns 431 23.1 Notes 435 24 Tactical return forecasting models 437 24.1 Introduction 437 24.2 What type of model? 438 24.3 Which assets/trades? 441 24.4 Which indicator types? 442 24.5 Enhancements and pitfalls 443 24.6 Notes 444 25 Seasonal regularities 445 25.1 Seasonal, cyclical, and secular patterns in asset returns 445 25.2 Monthly seasonals and the January effect 446 25.3 Other seasonals 453 26 Cyclical variation in asset returns 457 26.1 Typical behavior of realized returns and ex ante indicators through the business cycle 458 26.2 Typical behavior of realized returns and ex ante indicators across different economic regimes 461 26.3 Notes 465 27 Secular trends and the next 20 years 467 27.1 Contrasting 1988–2007 with 1968–1987 467 27.2 Reversible and sustainable secular trends 468 27.3 The next 20 years 474 27.4 Notes 478 28 Enhancing returns through managing risks, horizon, skill, and costs 479 28.1 Introduction: how can investors enhance returns? 479 28.2 Risk 482 28.3 Investment horizon 492 28.4 Skill 496 28.5 Costs 499 28.6 Notes 501 29 Takeaways for long-horizon investors 503 29.1 Key takeaways from theory 504 29.2 Empirical return sources 504 29.3 My take on key debates 506 29.4 Know thyself: large long-horizon investors’ natural edges 512 29.5 Institutional practices 513 29.6 Notes 514 Appendices 515 A World wealth 515 A.1 Global total 516 A.2 Asset class detail 516 A.3 Notes 518 B Data sources and data series construction 519 B.1 Asset class and sector returns 519 B.2 Strategy style returns 521 B.3 Factor proxies 522 B.4 Forward-looking yields and spreads 523 B.5 Survey data and expected inflation 523 B.6 Miscellaneous other 524 Bibliography 527 Index 551