Could somebody please elaborate Ex Ante Risk & Return? I thought I knew this until I read the below statement on the net and has got me thoroughly confused
“If the data series contains a period of possible extreme negative event, an analyst is likely to underestimate the ex ante risk and over estimate the ex ante return only if the extreme event did not materialize.” Thanks in advance for your help.
If it’s possible that something really bad will happen, and it happens , you probably won’t underestimate the risk, and you probably won’t overestimate the return.
If it’s possible that something really bad will happen, and it doesn’t happen , you might underestimate the risk, and you might overestimate the return.
So, if it’s possible that something really bad will happen, it’s more likely that you will underestimate the risk and overestimate the return if the bad thing doesn’t happen than if it does.
Means that if historical data is used and at that time their was a possible negative extreme event, analysts at that time period would have predicted a higher risk, and lower returns from the asset. However since the negative event did not happen, analysts in future periods would look at the data and conclude that their was a higher amount of return and lower risk (my guess is becuase with higher risk, investments would be lower. When the negative event does not occur, more investors will invest and drive up the price)
Thank you Magician and Zanalyst Very clear now…