Taking Uncertainty Into Account In Projecting
Portfolio Accumulation
Sherman
Hanna
Professor, Consumer
& Textile Sciences Department, Ohio State University
Hopewell (1997) called for greater attention
by financial planners to uncertainty. This paper provides a unique approach
to dealing with the uncertainty of projecting stock accumulations. The
standard approach is to take mean rates of return in projecting portfolio
growth, with perhaps a separate discussion of the range of possible rates
of return (e.g., Mittra, 1995, p. 394). This paper provides a mean/worst
case approach that can be made understandable to clients. For accumulation
projections with a horizons of 10-15 years, the worst case projections
might be intimidating, as the worst case accumulations are less than 30%
of the mean accumulation for most horizons. However, the worst case projections
may serve to adequately inform clients of the range of possible outcomes.
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table from the paper (In HTML format.)
NOTE: You can view and print the 3/98 version of the paper, presented
at the Midwest Finance Association in March, 1998.
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