Bridge over ocean
1 September 1993 Financial Analysts Journal Volume 49, Issue 5

Estimating Expected Return

  1. Fischer Black
If we want to estimate expected return on individual securities or on a portfolio, we need theory. Estimates based on past data are inaccurate, partly because of the many ways in which people can "mine" past data. "Explaining average return" is like explaining variance, but does little to help us estimate expected return. Theory can help, though, by telling us how factors are priced and why factors and securities are mispriced.
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