oneboy

1. Market prices tell explicitly what returns are available.

Example given by Stalla is that "a stock's return can be estimated by using the dividend yield plus the growth rate." (DDM) I guess what its saying is that since stock prices are public knowledge, you can determine the expected return (future prices - current prices) for the stocks based on various models. Whatever data is available shows what returns are available.


2. Relative expected returns reflect relative risk perceptions.

This is the basic relationship between risk and return. Investors want additional return for assuming additional risk. If the perceived relative risk is high (i.e. Emerging markets equity), then they expect higher returns.


3. Markets are rational and mean reverting.