Chapter 9: Forecasting Risk and Return

We will look at forecasting models for several variables. We want predicted variables to be observable. When they are forecasts and true (observed) variables can be compared. The following can be predicted: The absolute size of future returns. Realized volatility is therefore observed. We ignore the direction of future price returns and assume the probability distribution to be symmetric. With these assumptions the forecast variable is a measure of risk of holding a position in the aaset. Future return over the forecast period including sign. This also implies a price forecast because future price is current price plus future return