Active Portfolio Management, Implied Expected Returns, and Analyst Optimism
Author | : Olaf Stotz |
Publisher | : |
Total Pages | : |
Release | : 2005 |
ISBN-10 | : OCLC:1291218755 |
ISBN-13 | : |
Rating | : 4/5 (55 Downloads) |
Book excerpt: This paper investigates whether implied expected returns based on the approach of CLAUS/THOMAS (2001) can be implemented in active portfolio management. This approach uses analysts' forecasts to derive return expectations by equating the present value of expected cash-flows to the current market price. It is found that active investment strategies which maximize implied expected returns significantly outperform a passive index investment. A significant part of this outperformance can be explained by the difference between the implied expected return and the return expectation justified by the CAPM. The empirical results suggest that a substantial part of this difference can be attributed to an optimism bias in analysts' forecasts.