How Did We Get Here? A Brief History of Expected Returns Formation

AQR

Antti Ilmanen

Research

16 Pages

AQR’s white paper examines the evolution of how investors estimate long-term expected returns, moving from naive historical averages to more sophisticated, valuation-aware models. The study highlights the limitations of extrapolation and emphasizes the value of forward-looking frameworks that blend historical context with current macro and market signals.

Key Takeaways

Rear-view extrapolation is risky: Relying on recent returns often misleads, as markets tend to mean-revert rather than trend persistently.
Forward models outperform: Valuation-anchored methods like yield-plus-growth have proven more consistent through cycles.
Blend history with foresight: Effective return forecasts combine long-term data with real-time market and macroeconomic indicators.
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