"We show analytically under quite general conditions that implied rates of return based onanalysts’ earnings forecasts are only a downward biased estimator for future expected one-periodreturns and therefore not suited for computing market risk premia. The extent of this bias is substantialas verified by a bootstrap approach. We present an alternative estimation equation for future expectedone-period returns based on current and past implied rates of return that is superior to simple estimatorsbased on historical returns. The reason for this superiority is a lower variance of estimation resultsand not the circumvention of the discount rate effect typically stated as a major problem of estimatorsbased on historical return realizations. The superiority of this new approach for portfolio selection purposesis verified numerically for our bootstrap environment and empirically for real capital market data." [author's abstract]
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