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?