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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.
face pic by Paul Alan Davis, CFA
Updated: February 17, 2021
One of the greatest challenges for active investors is to evaluate when forecasts differ from market expectations. Learn more below.

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Forecast return versus expected return


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


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.

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.

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