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Market return

As explained in Build a Robo-Advisor with Python (From Scratch)

Market return is the return of the broad market portfolio over a specified period.

Market return measures the broad market portfolio's performance over a specified period. In CAPM, expected stock returns combine the risk-free rate with the market risk premium scaled by beta. section 3.1.2

A practical CAPM workflow uses market return to:

  • Represent the market with SPY historical prices. section 3.1.2
  • Compute monthly percentage returns and estimate their annualized average. section 3.1.2
  • Compare market returns with risk-free returns when estimating stock beta. section 3.1.2

Annualized market-return estimate

Using monthly SPY returns, multiplying the mean by 12 produces an average annualized market return of 8.0741%. This historical estimate becomes an input to CAPM rather than a guaranteed forecast. section 3.1.2

mkt_prices = yf.download('SPY', start='2000-01-03', end='2023-12-30')
 ['Adj Close']

Inspect the SPY price-download step used to construct the market-return series. section 3.1.2

How Build a Robo-Advisor with Python (From Scratch) covers it

How deep it goes
Computes monthly returns and annualizes their mean, but does not develop alternative market proxies or return-model assumptions.
Examples
Uses SPY historical prices, monthly percentage returns, and an 8.0741% annualized average market return.
What it assumes
Assumes familiarity with percentage returns and introduces market return alongside risk-free rate and beta.
What you can do after
Apply it via Python to construct a market-return series and supply CAPM expected-return calculations.
How it connects
Connects market return to CAPM, beta, risk-free rate, excess returns, and expected return.
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Related concepts

This explainer was generated by Manning's knowledge graph from the text of Build a Robo-Advisor with Python (From Scratch). The section links point to the parts of the book it draws on.