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Estimation of expected returns
Tim Vidmar
posted

Most of the algorithms that I have developed so far (none of them has been any good, btw, that has to be said) have depended in one way or another on estimates of expected returns. Expected returns are, if I understand it correctly, of course, required for portfolio optimization, CAPM related approaches and even momentum ranking. I have found it very difficult to obtain their estimated values that would have been statistically significant, though. My question to the community is therefore the following:

1) Do you yourself use such estimates in your algorithms?
2) If so, have you been able to estimate them reliably?

Sincerest thanks for any comments that you are willing to provide.

3 responses
Minh

I haven't got the slightest clue to predict returns. I only had slight success with an on or off approach for momentum. I would compare the current price to a simple moving average or get the total return for the past twelve months but never had any way to get estimates of future returns. I only ever had success with a risk parity approach.

Deleted User

Tim,

1) Yes I am always kicking around different ways to approach expected returns.
2) That is the $64,000 question. I took a stab at creating some unique logic for calculating expected returns in the example below (but even my comments suggest I didn't have faith in the approach).

  • Frank
Tim Vidmar

@Minh: Many thanks for sharing your exeperience, very valuable!

@Frank: Very kind of you to have shared your unique algo, much appreciated!

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