Financial Education

When estimating the risk and return characteristics of various asset classes, there are a number of tools available to analysts.

1. Statistical methods can be descriptive (classify past results) or inferential (used for predicting results.)
   • Sample estimators estimate the future mean and variance based on the sample’s past mean and variance.
   • Shrinkage estimators rely on judgment to weight historical estimates with other parameters in order to reduce the impact of extreme values
   • Time series estimators forecast a variable based on the lagged values of either the variable itself or other variables
   • Multi-factor models explain returns for an asset in terms of the values of a set of return drivers or risk factors
2. Discounted cash flow models express current value in terms of the future cash flows an asset will generate
3. The risk premium approach expresses expected return as the risk free rate plus a risk premium that reflects the uncertainty surrounding future results
4. Financial market equilibrium models describe relationships between expected return and risk in which supply and demand are in balance

For more information, see all articles on: Asset Allocation, FInancial Planning, Investment Returns, Portfolio Management

See also:

Framework for Setting Capital Market Expectations

The Role of Capital Market Expectations in Portfolio Management

The Role of Capital Market Expectations in the Portfolio Management Process

The Role of Strategic Asset Allocation in Portfolio Management

Strengths and Weaknesses of Multi-Stage Dividend Discount Models