Several studies on portfolio construction reveal that sensible strategies essentially yield the same results as their nonsensical inverted counterparts; moreover, random portfolios managed by Malkiel’s dart-throwing monkey would outperform the cap-weighted benchmark index. Forecasting the future development of stock returns is an important aspect of portfolio assessment. Similar to the ostensible arbitrariness of portfolio selection methods, it is shown that there is no substantial difference between the performances of “best” and “trivial” forecasts - even under euphemistic model assumptions on the underlying price dynamics. A certain significance of a predictor is found only in the following special case: the best linear unbiased forecast is used, the planning horizon is small, and a critical relation is not satisfied.

prediction, stock returns, modified Black-Scholes model, relative volatility, critical relation.

Received: July 5, 2021; Accepted: August 16, 2021; Published: October 1, 2021

How to cite this article: Michael Weba, Prediction of stock returns may be fallacious: a stochastic confirmation of Malkiel’s assertion on dartboard investments, Far East Journal of Theoretical Statistics 62(2) (2021), 131-150. DOI: 10.17654/TS062020131

This Open Access Article is Licensed under Creative Commons Attribution 4.0 International License

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