Computing implied returns in a meaningful way

Ulf Herold ()
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Ulf Herold: Applied Research, Metzler Investment

Journal of Asset Management, 2005, vol. 6, issue 1, No 5, 53-64

Abstract: Abstract The fact that mean-variance optimisers are highly sensitive to changes in expected returns is well known in investment practice. A common approach is therefore to turn the problem around: instead of starting with a set of expected returns and solving for optimal weights, implied returns are extracted from a given portfolio structure. By comparing the implied returns with the expected returns that an investor might have, the portfolio weights can be changed in an iterative way. The difficulty is that there is no unique set of implied returns. This paper shows that the common procedure of determining the implied returns will often lead to unreasonable values, and it provides a modification that results in sensible and more realistic implied returns.

Keywords: asset allocation; portfolio optimisation; implied returns; reverse engineering (search for similar items in EconPapers)
Date: 2005
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DOI: 10.1057/palgrave.jam.2240165

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