WebCab Portfolio for COM v5.0 Demo

AssetParameters.ExpectedReturnForward Method 

Evaluates the expected return of an asset given the (finite) probability distribution of its returns.

public double ExpectedReturnForward(
   double[] probability,
   double[] returns
);

Parameters

probability
probability[s] is the probability of the state s occurring. The probabilities here are given in decimal format (i.e. 1 percent = 0.01).
returns
returns[s] is the (in absolute or relative percentage terms) return from the asset in the state s. Note that of the absolute (resp. percentage) returns are used then the estimated return will be expressed in absolute (resp. relative percentage) terms. Moreover, if the daily returns are used then the estimated return is an estimate of the expected daily return and so on.

Remarks

That is, if we expect one of a finite number of possible market conditions for which we can estimate the probability of there occurrence and corresponding returns then this method provides a forward looking estimate of the expected return.

Further Explanation

This approach to estimating the (future) return is particularly applicable when there are a number of alternative market events which could have a major influence on the assets price under consideration. It is necessary that we are able to reasonably well estimate the probability of these events taking place and the likely level of return which will result. In such instances this (forwardly looking) approach to estimating the future (expected) return is more appropriate than using backwardly looking estimates based on recent historical prices.

When should the scenario approach be used?

In general terms this estimate should be used when you explicitly need a forward looking estimate and you anticipate one event from a finite number of possibilities occurring. For example, this approach is particularly applicable when a takeover of a quoted company has been announced and the share price converges to almost the offer price in anticipation of the takeover being completed. In this scenario the more likely the takeover being completed the closer the price will be to the offer price. If the takeover breaks down then the price will likely experience sharp moves to price levels found prior to the takeover being announced. By estimating the chance that each scenario and the likely level of return we are able to give an reasonably good forward looking estimate.

See Also

AssetParameters Class | WebCab.COM.Finance.Portfolio Namespace