Home About Latest Browse RSS Advanced Search

Board of Governors of the Federal Reserve System (US)
Finance and Economics Discussion Series
The expected real return to equity
Missaka Warusawitharana
Abstract

The expected return to equity--typically measured as a historical average--is a key variable in the decision making of investors. A recent literature based on analysts forecasts and practitioner surveys finds estimates of expected returns that are sometimes much lower than historical averages. This study presents a novel method that estimates the expected return to equity using only observable data. The method builds on a present value relationship that links dividends, earnings, and investment to market values via expected returns. Given a model that captures this relationship, one can infer the expected return. Using this method, the estimated expected real return to equity ranges from 4 to 5.5 percent. Furthermore, the analysis indicates that expected returns have declined by about 2 percentage points over the past forty years. These results indicate that future returns to equity may be lower than past realized returns.


Download Full text
Download Full text
Cite this item
Missaka Warusawitharana, The expected real return to equity, Board of Governors of the Federal Reserve System (US), Finance and Economics Discussion Series 2011-14, 2011.
More from this series
JEL Classification:
Subject headings:
Keywords: Stock - Prices ; Forecasting ; Investments ; Securities
For corrections, contact Ryan Wolfslayer ()
Fed-in-Print is the central catalog of publications within the Federal Reserve System. It is managed and hosted by the Economic Research Division, Federal Reserve Bank of St. Louis.

Privacy Legal