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Estimating Long-Term Expected Returns

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  • Rui Ma
  • Ben R. Marshall
  • Nhut H. Nguyen
  • Nuttawat Visaltanachoti

Abstract

Estimating long-term expected returns as accurately as possible is of critical importance. Researchers typically base their estimates on yield and growth, valuation, or a combined yield, growth, and valuation (“three-component”) framework. We run a horse race of the abilities of different frameworks and input proxies within each framework to estimate 10- and 20-year out-of-sample returns. The three-component model based on the TRCAPE valuation proxy outperforms estimates based on historical mean benchmark returns, with mean square error improvements exceeding 30%. Using this approach in asset allocation decisions results in an improvement in Sharpe ratios of more than 50%.

Suggested Citation

  • Rui Ma & Ben R. Marshall & Nhut H. Nguyen & Nuttawat Visaltanachoti, 2024. "Estimating Long-Term Expected Returns," Financial Analysts Journal, Taylor & Francis Journals, vol. 80(4), pages 134-154, October.
    • Handle: RePEc:taf:ufajxx:v:80:y:2024:i:4:p:134-154
    DOI: 10.1080/0015198X.2024.2358737
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