An ad-free and cookie-free website.
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%.
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.
Many terms have 4-5 minute videos showing a derivation and explanation. If this term had one, it would appear here.
Videos can also be accessed from our YouTube Channel.
If this term had a video, the script would be here.
Click box for answer.
True. By and large, individuals may not have the knowledge or time to implement this type of structured process.
Still unclear on Forecast Returns? Check out the 27-video deep-dive into Excel for financial modeling series called Quant 101.
Our trained humans found other terms in the category timeframes you may find helpful.
Be a part of the movement. Get smarter. Subscribe and follow now.
A newly-updated free resource. Connect and refer a friend today.