Economic Significance of Predictable Variations in Stock Index Returns.

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 percent of the value of the assets managed. During 1954:4 to 1986:12, the variance of monthly retuns on the managed portfolio was about 60 percent of the variance of the returns on the value weighted index, whereas the average return was two basis points higher. Copyright 1989 by American Finance Association.