Build a Better Process

# Forecast Return Definition and Quiz

A passive manager accepts investment valuation levels at every point in time. An active manager acts on valuations that differ from proprietary forecasts.
1. Define - Define Forecast Return for investments.
2. Context - Use Forecast Return in a sentences.
3. Quiz - Test yourself.
Updated: February 17, 2021
One of the greatest challenges for active investors is to evaluate when forecasts differ from market expectations. Learn more below.

/ factorpad.com / fin / glossary / forecast-return.html

## 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.

### Video

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.

### Video Script

If this term had a video, the script would be here.

### Quiz

Historical refers to the past. Expected refers to the present. Forecast refers to the future. | True or False?

True

A process of setting forecast returns and estimating expected returns is more common with professionals than individual investors. | True or False?

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.

### Related Terms

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

## What's Next?

Be a part of the movement. Get smarter. Subscribe and follow now.

• For all Glossary terms, click Outline.
• To learn about Fixed and Variable Investments, hit Back.
• Your kindness helps someone less fortunate learn, click Tip.
• Follow along as we move on to Frequency Distribution, click Next.

/ factorpad.com / fin / glossary / forecast-return.html

forecast return
anticipated return
market expectations
active return
forecast alpha
alpha signal
what is forecast return
capm model
Capital Asset Pricing Model
market forecast
stock valuation
modern portfolio theory
stock forecast
investment forecast
stock expected return

A newly-updated free resource. Connect and refer a friend today.