Expected Returns

"Beginning with comprehensive introduction and overview, Expected Returns goes on to analyze the historical record, give a roadmap of terminology, explore rational and behavioral theories, and look at alternative interpretations for return predictability. A series of case studies provide detailed analysis of assets (equity, bond and credit risk premia, as well as alternative asset classes), dynamic strategy styles (value, carry, momentum, volatility) and underlying risk factors (growth, inflation, liquidity and tail risks), before moving back to broader themes, including time-varying expected returns, and seasonal, cyclical and secular return patterns."--Dust jacket p. [2].

'...insightful and wonderfully lucid book'. (Economist, April 2011).

Auteur

Antti Ilmanen is a Principal at AQR Capital Management, a leading global investment-management firm. Since starting as a central bank portfolio manager in Finland in 1986, Antti has worn many hats to bridge academic finance and practitioner investing. Having earned a finance PhD in 1994 from the University of Chicago Graduate School of Business, he spent a decade at Salomon Brothers/Citigroup as a bond researcher, strategist, managing director and a trader. Before joining Brevan Howard in 2004, Antti had published extensively in finance and investment journals and had received a Graham & Dodd scroll and the Bernstein Fabozzi/Jacobs Levy award for his articles. Over the years, Antti has advised many institutional investors, most regularly Norway's Government Pension Fund Global on its long-run investment strategy.

Texte du rabat

Expected Returns is a one-stop reference that gives investors a comprehensive toolkit for harvesting market rewards from a wide range of investments. Written by an experienced portfolio manager, scholar, strategist, investment advisor and hedge fund trader, this book challenges investors to broaden their minds from a too-narrow asset class perspective and excessive focus on historical performance. Coverage includes major asset classes (stocks, bonds, alternatives), investment strategies (value, carry, momentum, volatility) and the effects of underlying risk factors (growth, inflation, illiquidity, tail risks). Judging expected returns requires balancing historical returns with both theoretical considerations and current market conditions. Expected Returns summarizes the state of knowledge on all of these topics, providing extensive empirical evidence, surveys of risk-based and behavioral theories, and practical insights. "This is the best book on active management ever written - and it achieves that status without mentioning a single stock or bond by name. Anyone who performs the rigorous analysis Ilmanen describes - admittedly a neat trick, since the world's most sophisticated investors struggle to do it successfully - will beat the market."
-Laurence B. Siegel, Former Director of Research, The Ford Foundation

"Antti Ilmanen shows the way forward for the investment management profession in this remarkable book. In a comprehensive and impressive way, he combines financial theory, historical performance data and forward-looking indicators, into a consistent framework for assessing expected returns and risk. His approach is both scientific and practical, based on decades of studies and his own trading experience. With a touch of personal wisdom and humility, Ilmanen's book is a fascinating and educational journey into the future of investment management."
-Knut N. Kjaer, Founding CEO of the Norwegian Government Pension Fund/NBIM and former president of RiskMetrics Group

"Ilmanen's wonderful book manages to be exquisitely readable while covering just about every aspect of the investment process. Filled with many, many fresh and useful insights. This volume deserves to be read and then kept close at hand - because it is sure to be needed again and again."
-Martin L. Leibowitz, Managing Director, Morgan Stanley, and former CIO, TIAA-CREF

Résumé
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.

Contenu

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 …