ABSTRACT
§6-1. In previous chapters, we have noted how the expected return on an asset is an instrumental determinant of the price at which the asset will sell in the marketplace. We have also observed how the expected return on an asset is often estimated using the past returns it has earned based on the prices it has been selling at in the market. Thus, if one wishes to base the estimate of an asset’s expected return on its past monthly returns then one must be able to observe the market prices at which the asset is trading on a monthly basis. There are occasions, however, when the market prices of assets either do not exist or can only be observed infrequently, and this can create difficulties with measuring returns on the given assets. Given this, our purpose in this chapter is to develop a technique for estimating the expected return on a particular asset using only figures provided by a firm’s accountants about the past profitability of the asset and of the book values at which the asset has been recorded in the firm’s accounting records. That is, we develop a procedure for estimating the expected returns on assets that does not involve the use of information about the prices at which the assets have traded in the market place in previous periods.
