Wednesday, May 14, 2014

"Risk Premia Forecasts"

A topic of abiding interest.
From The Capital Spectator, 12 May 2014:
This month’s outlook for long-run risk premiums (return over the “risk-free” rate) is generally unchanged from the previous estimates. For example, the Global Market Index (GMI)–an unmanaged, market-value weighted mix of all the major asset classes—is currently expected to generate an annualized 4.1% risk premium, based on analysis of data through April 2014. The projection matches last month’s forecast.

After making an adjustment for short-term momentum and long-term mean reversion factors, GMI’s projected risk premia drops to an annualized 3.7% (the adjustment rules are summarized below). By comparison, GMI’s trailing three-year annualized risk premium is a relatively high 6.5% through April 2014.
Here’s a summary of the current projected risk premia for GMI and the major asset classes:
erp.tab.12may2014
For a bit of perspective on what recent history has delivered, here’s a review of rolling three-year annualized risk premia for GMI, US stocks (Russell 3000) and US Bonds (Barclays Aggregate Bond Index)....MORE