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Historical Returns and the Appropriate Time-Frame for Future Value Calculations: Implications for Risk Management and Personal Financial Planning

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  • Ewing Bradley T.

    (Texas Tech University)

  • Thompson Mark A.

    (Texas Tech University)

Abstract

In future value calculations, investors often assume that the real return is constant over the planning horizon. We examine whether this assumption is appropriate. Our results suggest that investors can expect to earn the historical average real return provided their horizon is at least 15 years for stocks and at least 7 years for bonds, depending on the size of recent shocks. This “rule of thumb” assures reasonable insulation from the inevitable fluctuations of the market.

Suggested Citation

  • Ewing Bradley T. & Thompson Mark A., 2012. "Historical Returns and the Appropriate Time-Frame for Future Value Calculations: Implications for Risk Management and Personal Financial Planning," Journal of Business Valuation and Economic Loss Analysis, De Gruyter, vol. 7(1), pages 1-12, May.
  • Handle: RePEc:bpj:jbvela:v:7:y:2012:i:1:n:2
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    References listed on IDEAS

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    1. Thorbecke, Willem, 1997. " On Stock Market Returns and Monetary Policy," Journal of Finance, American Finance Association, vol. 52(2), pages 635-654, June.
    2. Ewing, Bradley T., 2001. "Cross-Effects of Fundamental State Variables," Journal of Macroeconomics, Elsevier, vol. 23(4), pages 633-645, October.
    3. Dickey, David A & Fuller, Wayne A, 1981. "Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root," Econometrica, Econometric Society, vol. 49(4), pages 1057-1072, June.
    4. Bollerslev, Tim, 1986. "Generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 31(3), pages 307-327, April.
    5. Granger, Clive W. J. & Hyung, Namwon, 2004. "Occasional structural breaks and long memory with an application to the S&P 500 absolute stock returns," Journal of Empirical Finance, Elsevier, vol. 11(3), pages 399-421, June.
    6. Bradley Ewing, 2002. "The transmission of shocks among S&P indexes," Applied Financial Economics, Taylor & Francis Journals, vol. 12(4), pages 285-290.
    7. Cheung, Yin-Wong & Lai, Kon S., 1995. "A search for long memory in international stock market returns," Journal of International Money and Finance, Elsevier, vol. 14(4), pages 597-615, August.
    8. William R. Parke, 1999. "What Is Fractional Integration?," The Review of Economics and Statistics, MIT Press, vol. 81(4), pages 632-638, November.
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