Forecast Return Definition and Quiz

1. Define - Define Forecast Return for investments.
2. Context - Use Forecast Return in a sentences.
3. Quiz - Test yourself.

by Paul Alan Davis, CFA

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Forecast return versus expected return

Intermediate

Forecast Return is the rate of return on an asset for a future time period measured using mathematical techniques. Only an active manager calculates forecast return, as it is used to determine if an asset is cheap or expensive. The active manager subtracts expected return from forecast return to create a buy or sell signal, or alpha signal.

Synonym: anticipated return

For context, it's important to realize that forecast returns are only set by active managers. Passive managers accept the current price as is and don't second guess it. The expected return can be found using the CAPM model.

Active managers may have conviction in their estimate of the value of an asset but the real challenge becomes determining why the market price is different.

Values can always be turned into return expectations. For example, if an active manager has an intrinsic value on a stock at $12 and the market price is $10, then the stock is 20% undervalued. The forecast return in this case is 20%.

In a Sentence

Pam:  We're so grateful you separated out historical, expected and forecast return.
Guy:  No problem. We just needed words to express past, present and future. Financial Engineering 101.

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Learn More About The Glossary

Still unclear on Forecast Returns? Check out the 27-video deep-dive into Excel for financial modeling series called Quant 101.

Related Terms

Our trained humans found other terms in the category timeframes you may find helpful.

• Expected return
• Historical return

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