Forecasting Long-Term Equity Returns: A Comparison of Popular Methodologies

PGIM Institutional Advisory & Solutions

September 2018

Despite considerable research on the topic, there remains a wide range of views on how best to generate the long-term equity return forecasts that CIOs use for their asset allocation decisions. To analyze this issue, our IAS team evaluates the out-of-sample historical performance of two common approaches, or methodologies, for estimating 10-year equity market returns:

  • A regression methodology using CAPE (the cyclically adjusted price-to-earnings ratio)
  • A more traditional “building block” (BBA) approach

Which approach has had a better track record? Has either approach produced better forecasts than simply using a long historical average return as a predictor of future returns?

 

READ THE STUDY TO FIND OUT  PDF opens in new window

 

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