Book Review: Expected Returns


How do we estimate what returns are reasonable to expect?  Most investment counselors fall back on easy rules of thumb, but is there a way of doing better?

In this book, the author takes academic research on investment returns, and tries to make it practical.  What are the main findings of the book?

  • Momentum works.
  • Value works.
  • Illiquid assets can work very well if you have a balance sheet that can hold them.
  • Carry strategies work most of the time, but when they fail, they fail big.  Same for strategies that sell volatility.

The book does a very good job in establishing that the excess returns of stocks over bonds are a lot lower than most believe.  It also supports the idea that moderate risk taking is the superior strategy.  Those that take high risks lose too often.  Those who take no risk don’t make anything significant.  Moderate risk-taking is the sweet spot.

One of the strengths of the book is that it considers almost all assets, and analyzes how many factors affect those asset classes.  The book is comprehensive; it covers everything, even if it is only an inch deep in spots.

I liked this book a lot, but it’s not for everyone.  You won’t find a lot of difficult math here, but you will find a lot of numbers.


I don’t agree with the idea of levering up low risk assets.  Yes, if you are  the only one doing it, fine, be a non-regulated pseudo-bank.  The trouble comes when many do it.  Eventually a liquidity crisis hits, and those levering up low risk assets get hosed.

The same is true of university endowments.  Too many thought it was easy money to invest in illiquid assets, and when the liquidity panic came in 2008-2009, they were forced to borrow, and/or sell illiquid assets at an inopportune time.

The book does cover everything, but it doesn’t cover everything deeply.  I think it is a valuable book to most who do asset allocation, but the author knows his limits, and does not claim to be expert in a number of areas.

Who would benefit from this book: Fundamental investors who want to understand the factors behind return generation can benefit from this book.  If you want to, you can buy it here: Expected Returns: An Investor’s Guide to Harvesting Market Rewards (The Wiley Finance Series).

Full disclosure: The publisher sent me a copy of the book for free.

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