Active Portfolio Management, Implied Expected Returns, and Analyst Optimism

Olaf Stotz

Financial Markets and Portfolio Management, 2005, vol. 19, issue 3, 275 pages

Abstract: 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. Copyright Swiss Society for Financial Market Research 2005

Date: 2005
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DOI: 10.1007/s11408-005-4694-0

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