# a. Ex-ante return

I have a query, pls reply. If there is a company A with an expected return of 22.5% and ex-ante return of 10% and there is another company B with an expected return of 24% and an ex-ante earning of 8%. Which of the two companies should one invest in and Why ? Thanks, Samit

Your numbers don’t make a lot of sense. ex ante return = expected return - required return So it is quite rare for your suggestion to be true, unless investment A and B are not really comparable and have different required rate of return. Otherwise, company A. You should always look for highest ex ante return. correct me if I am wrong.

I agree w/ vitaminc that the question doesn’t make sense as stated, but works if we rephrase “ex-ante return” and “ex-ante earning” as “ex-ante alpha.” i.e. excess positive risk-adjusted return. The alpha is a component of the expected return, specifically the portion in excess of the required return. It looks like A’s got a lower required return and higher alpha. So choose A if they’re mutually exclusive, otherwise invest in both as they’re both expected to produce alpha.

i think he meant to say req rets are 22,24, so then you would go with the company with the highest ex ante …

jain_samit Wrote: ------------------------------------------------------- > I have a query, pls reply. If there is a company A > with an expected return of 22.5% and ex-ante > return of 10% and there is another company B with > an expected return of 24% and an ex-ante earning > of 8%. > > Which of the two companies should one invest in > and Why ? > > Thanks, > > Samit How can you have ex-ante return? Returns are by definition ex-post. As in they already happened. Obviously you can have expected returns… and these would be ex-ante… but I don’t see how ex-ante returns would be anything other than expected returns… You can calculate estimates of ex-anti tracking error… Am I missing something?

Ex ante alpha is expected holding period return - required return.

Anybody care to answer my question?

i think you have to take into consideration the risk adjusted alpha

Now you’re just being redundant. Alpha is, by definition, risk adjusted. Dante’s question was answered before it was asked. The problem with this thread is that the terms “return” and “alpha” are being used interchangeably, yet they’re very distinct. (vitamc has got the correct formula for ex ante alpha but labeled it as “return”; similarly, jain_samit’s post treats these terms as fungible, but wyantjs is right on target). Dante, I’m almost certain your confusion is stemming from the reckless use of vocabulary in this thread. You’re correct that actual return is, by definition, past tense. However, check out the index in your LII volumes for discussions of alpha (i.e. excess risk-adjusted return, a.k.a abnormal return). In particular, the terms are defined on page 23 of Volume IV which specifies the calculation of both ex ante alpha and ex post alpha. The confusion should stop here and now.

wow… I think we need to appoint hiredguns as the managing director in charge of stomping on reckless use of vocab with particular distinction in ferreting out inappropriate fungibility.

I put my interpretation of this question along with my answer here: http://www.analystforum.com/phorums/read.php?11,656029

maratikus is that u on gmatclub? LOL