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Survey-based subjective expected returns
• Survey-based expected returns provide useful real-time information about investor views.
• Representativeness and timeliness problems can cause survey forecasts to be noisy proxies of the market’s expectations.
• Consensus forecasts may not be great predictors of the future and may not even be rational. This would not preclude a survey from being unbiased and representative, as the same criticism can apply to market forecasts.
• If survey evidence is taken at face value, it can help distinguish between rational and irrational interpretations of return predictability.
• Retail survey views of prospective equity returns tend to be procyclical, in contrast to countercyclical estimates from market valuation indicators.
The market’s expected returns and rate expectations are not directly observable (with the exception of the prospective return of a horizon-matching default-free bond). Under the rational paradigm, any evidence that econometric forecasting models or valuation measures can predict future returns is interpreted as time variation in the market’s reasoned return expectations. Empirical forecasting and/or valuation signals typically indicate that objectively feasible future equity market returns are low after several years of high realized returns and rising valuation ratios. This could reflect rational investors accepting lower expected returns due to lower perceived risk or it could reflect risk aversion in good times. However, ...

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