Abstract
I present simple estimators for the expected returns of stocks and bonds and compare them to the standard historical, or sample mean, estimator. I show that as a result of a capital gains constraint that stocks and bonds must satisfy, the historical estimator can be acutely biased. I further show that an estimator for the expected return of stocks derived from the Edwards-Bell-Ohlson equation yields unbiased estimates that are useful in practice. Finally, I estimate the equity risk premium and show that it is positive, contradicting Arnott and Ryan's [2001] claim that it is negative.
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