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Expected Returns: An Investor's Guide to Harvesting Market Rewards
This comprehensive reference delivers a toolkit for harvesting market rewards from a wide range of investments. Written by a world-renowned industry expert, the reference discusses how to forecast returns under different parameters. Expected returns of major asset classes, investment strategies, and the effects of underlying risk factors such as growth, inflation, liquidity, and different risk perspectives, are also explained. Judging expected returns requires balancing historical returns with both theoretical considerations and current market conditions. Expected Returns provides extensive empirical evidence, surveys of risk-based and behavioral theories, and practical insights.
608 pages, Hardcover
First published March 14, 2011
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1818 people want to read
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Displaying 1 - 19 of 19 reviews
August 22, 2018
This is a magnificent book. It’s also absolutely massive, 500+ pages totally stuffed with information. The recent recruit to AQR, Antti Ilmanen, with a long experience from the Finish central bank, Salomon Brothers FX-department and the hedge fund Brevan Howard is a sponge concerning financial knowledge. There is enough knowledge content in this book to get the highest grade twice. I’m not surprised that Norges Bank Investment Management uses him as an advisor. With this book we can all get that advice for a more modest fee than NBIM probably pays.
The bulk of the text consists of chapters that present three different ways to analyse expected returns. As AQR luminary Cliff Asness points out in his foreword, there are two ways to earn returns and that is either to get paid to bearing a risk or to use someone else’s systematic mistakes. The chapters cover; 4 asset classes - stocks, credits, government bonds and alternative investments; 4 strategy styles – value, trend, carry and volatility; and 4 underlying risk factors – growth, illiquidity, inflation and tail risks. The different viewpoints give the reader a quite nuanced view of risk factors and a good understanding of sources of returns.
I find a pair of the key points that Ilmanen constantly keeps pounding in especially important and/or novel. They are firstly the time varying nature of expected returns, i.e. how expected returns the next few years depends on starting valuation, on the amount of overcrowding and the on the environment. The author even tries to present the reader with a systematic method to estimate returns over different asset classes. Secondly, the author often comes back to the notion of tail risk premium meaning that there is over time a payment to be had from owning assets that perform the worst at exactly the wrong time – when the stock market declines.
The ending advice are amongst other to pursue several strategies in parallel to harvest diverse sources of expected returns as long as they are not overvalued, that investors should diversify more than they do and use leverage to leverage up low volatility assets and the low volatility parts within different assets. Further, try to find sources of return that show low correlation such as value and momentum and don’t buy lottery ticket types of securities within assets.
The book took quite a while to read. It is hard work and it’s certainly primarily suited for professional investors. The reader will be taken up to speed on practically everything that has happened within academic finance and quantative asset management during the last 30 years. It would almost be a pity if too many read the book. Asness jokingly says that he briefly considered having Ilmanen killed instead of writing the foreword but decided that he would instead have to work another 20 years so Illmanen would have something to write about in the next book.
The author combines a broad knowledge of academic research, number crunching – even though the book doesn’t contain much math – and an understanding that history does not tell the entire story. It’s an inspiring book that will arm the reader with knowledge not only to understand best practice in the asset management business but also to shape future best practice. The book glows with a passion to understand the world and the author even includes his email for anyone that wants to comment on the book and take his learning process further.
This is a tough read but those who take the time will be greatly rewarded. If you don’t take the time? Well, it’s you’re funeral.
The bulk of the text consists of chapters that present three different ways to analyse expected returns. As AQR luminary Cliff Asness points out in his foreword, there are two ways to earn returns and that is either to get paid to bearing a risk or to use someone else’s systematic mistakes. The chapters cover; 4 asset classes - stocks, credits, government bonds and alternative investments; 4 strategy styles – value, trend, carry and volatility; and 4 underlying risk factors – growth, illiquidity, inflation and tail risks. The different viewpoints give the reader a quite nuanced view of risk factors and a good understanding of sources of returns.
I find a pair of the key points that Ilmanen constantly keeps pounding in especially important and/or novel. They are firstly the time varying nature of expected returns, i.e. how expected returns the next few years depends on starting valuation, on the amount of overcrowding and the on the environment. The author even tries to present the reader with a systematic method to estimate returns over different asset classes. Secondly, the author often comes back to the notion of tail risk premium meaning that there is over time a payment to be had from owning assets that perform the worst at exactly the wrong time – when the stock market declines.
The ending advice are amongst other to pursue several strategies in parallel to harvest diverse sources of expected returns as long as they are not overvalued, that investors should diversify more than they do and use leverage to leverage up low volatility assets and the low volatility parts within different assets. Further, try to find sources of return that show low correlation such as value and momentum and don’t buy lottery ticket types of securities within assets.
The book took quite a while to read. It is hard work and it’s certainly primarily suited for professional investors. The reader will be taken up to speed on practically everything that has happened within academic finance and quantative asset management during the last 30 years. It would almost be a pity if too many read the book. Asness jokingly says that he briefly considered having Ilmanen killed instead of writing the foreword but decided that he would instead have to work another 20 years so Illmanen would have something to write about in the next book.
The author combines a broad knowledge of academic research, number crunching – even though the book doesn’t contain much math – and an understanding that history does not tell the entire story. It’s an inspiring book that will arm the reader with knowledge not only to understand best practice in the asset management business but also to shape future best practice. The book glows with a passion to understand the world and the author even includes his email for anyone that wants to comment on the book and take his learning process further.
This is a tough read but those who take the time will be greatly rewarded. If you don’t take the time? Well, it’s you’re funeral.
September 17, 2020
One of the most extensive books I have read on the matter. It’s a must read for anyone who wants to adventure in the investment and asset management world. I’m impressed on the huge quantity of information there is in there.
With this book you will get an overview of how the different asset classes behave, what strategies you can use to maximize your returns, and much more.
With this book you will get an overview of how the different asset classes behave, what strategies you can use to maximize your returns, and much more.
January 28, 2025
To say that Expected Returns feels like a tour de force is an understatement. The book provides a comprehensive overview and analysis of individual asset classes, trading strategies, and the underlying economic fundamental factors that interconnect to generate asset returns. The core messages of the book are pragmatic and offer sobering conclusions:
- There is a crucial distinction between an asset’s ex-ante risk premium and its ex-post realized returns. The former represents the minimum perceived reward required for holding an asset compared to a risk-free investment. The latter represents the actual realized returns of an asset, which can be lower or higher than the ex-ante risk premium.
- Ex-ante premiums can typically be explained by the sum of an asset’s sensitivities (known as betas) to different risks, whether they be business cycle risk, inflation risk, illiquidity risk, or others. Investors demand higher rewards for greater risk, seeking compensation for assets that perform particularly poorly during challenging market conditions. What often appears as above-average asset returns is actually greater exposure to certain risks.
- Beyond rational risk-based premiums, markets can be subject to investor irrationality when pricing assets. Examples include the consistent overpricing of attractive growth equities (due to extrapolative expectations) and underpricing of value equities. However, it is often difficult to determine whether returns are driven by risk premiums or market irrationality.
- Predicting asset returns is a complex task, and people frequently mistake past returns as indicators of future performance. Our understanding of past performance is further distorted by various biases, including survivorship bias, time-period bias, fat-tails bias (the “peso problem”), and data mining bias. Forward-looking indicators typically provide better estimates of future returns.
To read the full review, see: https://ragoragino.dev/essays/2025-01...
- There is a crucial distinction between an asset’s ex-ante risk premium and its ex-post realized returns. The former represents the minimum perceived reward required for holding an asset compared to a risk-free investment. The latter represents the actual realized returns of an asset, which can be lower or higher than the ex-ante risk premium.
- Ex-ante premiums can typically be explained by the sum of an asset’s sensitivities (known as betas) to different risks, whether they be business cycle risk, inflation risk, illiquidity risk, or others. Investors demand higher rewards for greater risk, seeking compensation for assets that perform particularly poorly during challenging market conditions. What often appears as above-average asset returns is actually greater exposure to certain risks.
- Beyond rational risk-based premiums, markets can be subject to investor irrationality when pricing assets. Examples include the consistent overpricing of attractive growth equities (due to extrapolative expectations) and underpricing of value equities. However, it is often difficult to determine whether returns are driven by risk premiums or market irrationality.
- Predicting asset returns is a complex task, and people frequently mistake past returns as indicators of future performance. Our understanding of past performance is further distorted by various biases, including survivorship bias, time-period bias, fat-tails bias (the “peso problem”), and data mining bias. Forward-looking indicators typically provide better estimates of future returns.
To read the full review, see: https://ragoragino.dev/essays/2025-01...
June 10, 2019
Antti Ilmanen is perhaps the leading authority in the field of quantitative finance and the foreword by the likes of Cliff Asness gives a much better clue to that than anything I could add here. The book simplifies and presents concepts from a wide arena of academic and practitioner work, while providing a decent helping of relevant references for further reading (not needed, in my opinion). In summary, this will stand as a must-read book for finance professionals till the author decides to meaningfully expand on the text (a decade and counting).
June 16, 2017
Good:
Solid academic study, explanations are comprehensive
Provide coverage on various investment methods and principles
Bad:
Dry reading, more textbook, less literature
Still quite conceptual, lacks modern case studies
Ugly:
Feels very outdated, many concepts covered already feel antiquated
Solid academic study, explanations are comprehensive
Provide coverage on various investment methods and principles
Bad:
Dry reading, more textbook, less literature
Still quite conceptual, lacks modern case studies
Ugly:
Feels very outdated, many concepts covered already feel antiquated
January 7, 2019
The holy grail. Keep it on your desk.
April 22, 2020
A comprehensive guide that should help both academics and practitioners, in a language both will appreciate
January 11, 2021
Excellent book
November 12, 2021
I found it to be not so beginner friendly. Also this book focuses on Wall Street.
November 1, 2022
Great book for practitioners of investment!
November 19, 2022
Considering the volume the lessons taken away are relatively few, as there are extensive overviews on expected risk premia etc. that are not too catchy to read.
Want to read
March 10, 2024HFA推荐，关于Macros的一本书。
July 3, 2025
I skimmed through the book, but it was enough to say that the content is too broad, and sometimes more beginner-level than advanced. Not as I had expected.
August 10, 2023
'Expected Returns' is a gripping thriller of a book because it lives and breathes the unspoken mission (maybe subconscious?) of academic finance - to systematize and grill down, neatly, to a number of risk factors, what investors, whether fundamental or technical, have been doing for decades and have been attributing returns and beta as their alpha. After all, in the words of Antti - you can never fully replicate what's going on in the heads of a discretionary manager and there's always the room to take their word for it that their returns are their genius. But quant is unfairly called black box! Academia always has to lag practice in finance due to the inherent nature of things (investors have to rack up decades of returns before academics even have any data to work with!), but academics surely have done a hell of a job in explaining and systematizing many factors. I'd even call it a somewhat embarrassingly few number of factors (value investors losing their shit over this), and I even amusingly noted, from the book, that the alpha pool is even shrinking, just because academics come up with new sources of alternative beta every now and then, to discretionary managers' demise.
Antti Ilmanen lays it all out - markets might not be fully efficient, but they sure are fucking efficient. What's the source of excess returns? Don't try to source returns by outsmarting someone else (clean alpha), but instead get it from harvesting market rewards, by bearing certain micro-founded, empirically documented, peer-reviewed, anecdotally economically intuitive risk premia.
Out of the massive number of risk premia out there in the market (quants working hard in investment banks and hedge funds tryna p-hack more and more premia every day), Antti nicely boils it down to 3 sources - asset, style, factor. Couldn't have been a better way to visualize it.
In my view, quant can be way better than a black-box, insulated, esoteric, elitist field only reserved for the mathematically gifted - Antti has laid it out that quant can actually be a hella of an intuitive and systematic way to visualize return sources of all investors. Sure, many things are inconclusive in the literature - the rational vs irrational camps, systematic vs discretionary, and I'm personally agnostic. But it got me thinking - holding all factors and beta risk constant, did the legends (Buffett, Klarman, Schloss etc) even generate clean Jensen's alpha? Recall that Jensen's alpha is the intercept of the Security Characteristic Line.
My theory - top down allocation and bottom up analysis are 2 sides of the same coin. Instead of allocating to assets or managers, allocate to beta factors that are determined ex ante, to outperform. We have to be as prescient and intelligent as Ben Graham in the 40s, who somehow determined ex ante that value would outperform, and thus being 50 years ahead of his time in the process. Is the next breakthrough beyond Modern Portfolio Theory - portfolio beta management instead of old-school asset management? Antti has even hinted to this in the last chapter, which I arrived at independently.
However, as promising as bearing risk premia may sound, smart beta performance has been mixed so far. Passive indexing can take guts as well. That being said, the literature says that smart beta lacks sufficient conviction and exposes the investor to many unintended bets? The equity premium also still remains a puzzle.
Such is life
Antti Ilmanen lays it all out - markets might not be fully efficient, but they sure are fucking efficient. What's the source of excess returns? Don't try to source returns by outsmarting someone else (clean alpha), but instead get it from harvesting market rewards, by bearing certain micro-founded, empirically documented, peer-reviewed, anecdotally economically intuitive risk premia.
Out of the massive number of risk premia out there in the market (quants working hard in investment banks and hedge funds tryna p-hack more and more premia every day), Antti nicely boils it down to 3 sources - asset, style, factor. Couldn't have been a better way to visualize it.
In my view, quant can be way better than a black-box, insulated, esoteric, elitist field only reserved for the mathematically gifted - Antti has laid it out that quant can actually be a hella of an intuitive and systematic way to visualize return sources of all investors. Sure, many things are inconclusive in the literature - the rational vs irrational camps, systematic vs discretionary, and I'm personally agnostic. But it got me thinking - holding all factors and beta risk constant, did the legends (Buffett, Klarman, Schloss etc) even generate clean Jensen's alpha? Recall that Jensen's alpha is the intercept of the Security Characteristic Line.
My theory - top down allocation and bottom up analysis are 2 sides of the same coin. Instead of allocating to assets or managers, allocate to beta factors that are determined ex ante, to outperform. We have to be as prescient and intelligent as Ben Graham in the 40s, who somehow determined ex ante that value would outperform, and thus being 50 years ahead of his time in the process. Is the next breakthrough beyond Modern Portfolio Theory - portfolio beta management instead of old-school asset management? Antti has even hinted to this in the last chapter, which I arrived at independently.
However, as promising as bearing risk premia may sound, smart beta performance has been mixed so far. Passive indexing can take guts as well. That being said, the literature says that smart beta lacks sufficient conviction and exposes the investor to many unintended bets? The equity premium also still remains a puzzle.
Such is life
February 10, 2017
Oh, academia after 2008 realized their nonsensical models are f***d up. Let me tell one thing, the expected long term return is 0, and that's it, no big science and useless analyses.
It's hard to believe, so why? Because there are no free things. If you want to make life better, you need to pay your time and efforts or hire a lot of "legal slaves" that would do your own better living ("successful" businesses even started wars on trying to defy the slavery), then those slaves will rise and will do yourself. Just show me anything that survived past 1000 years without any payment in some form. Entropy cancels everything and bigger (temporary) alpha increases entropy levels.
Let's say sugar had higher expected return. Let me ask - why? Because a lot of idiots eating tons of sugar with drinks consumed a lot of it and became big fat pigs. Cause and a consequence which essentially means that you can earn "returns" only if you create better lies (illusions, "new truths") or just steal something (in case of sugar or oil, as examples). If you can back them with your professional "titles" even better. So, let's be real, America had learned that lesson and media constantly tries to create good trade opportunities squeezing them from "legal slaves".
You're living in a society of spectacle.
P.S. After 6 months, some people complain about my "review". First, everything that's mentioned here are already dead, don't you get? CAPM, for example, is from 1960s. As a consequence, second, it's not practical, and therefore not useful for me, we already have many books on the same subjects. It seems some people have nothing to do. Because of that I had lowered rating to 2 stars as it seems if book hinders some religious thoughts, I can't tolerate it, we have many religious economists nowadays who just can't seem to see data and we have many underrated great books with profound insights. Another reason that this book is clearly overrated (4.44) using some advertising as even books that reveal something new and useful aren't rated so high. It's fine demonstration of people who know nothing, say nothing, but rate it highest. Would be nice to hear what's exactly so good about this book.
November 27, 2013
An absolute required reading for anybody in the quant finance space or those teaching themselves trading strategies and learning what risk premia is and how to capture it.
A rigorous anthology of academic research on so many. This really is THE book for anybody trying to create or understand alternative beta or hedge fund strategies.
A rigorous anthology of academic research on so many. This really is THE book for anybody trying to create or understand alternative beta or hedge fund strategies.
January 27, 2016
A very comprehensive book on expected (and realized!) returns of many asset classes, risk premia and investment strategies. Written in a very balanced way, describing various opinions in the academic literature, but always expressing and motivating his personal preferences.
February 13, 2018
The single best investment book I know.
Read twice.
Read twice.
November 4, 2023
One of the most informative books regarding financial markets. Definitely worth a read!
Displaying 1 - 19 of 19 reviews