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Economic Significance of Predictable Variations in Stock Index Returns
William Breen, Lawrence R. Glosten and Ravi Jagannathan
The Journal of Finance
Vol. 44, No. 5 (Dec., 1989), pp. 1177-1189
Stable URL: http://www.jstor.org/stable/2328638
Page Count: 13
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Knowledge of the one-month interest rate is useful in forecasting the sign as well as the variance of the excess return on stocks. The services of a portfolio manager who makes use of the forecasting model to shift funds between bills and stocks would be worth an annual management fee of 2% of the value of the assets managed. During 1954:4 to 1986:12, the variance of monthly returns on the managed portfolio was about 60% of the variance of the returns on the value weighted index, whereas the average return was two basis points higher.
The Journal of Finance © 1989 American Finance Association