Combining analysts' forecasts with causal model forecasts of earnings growth

In combination forecasting the conventional approach is to combine the experts or the analysts forecast with a time-series model forecast. An alternative approach is to combine the analysts forecast with a causal model forecast. The major component of the proposed expected-return/causal model is the Capital Asset Pricing Model (CAPM). It is found that combining financial analysts consensus forecasts with CAPM simulated ex-ante forecasts consistently leads to superior forecasts of five-year earnings-per-share growth rates, on average, relative to either component forecast. This result holds over four adjacent five-year time horizons, ending in 1990, the last year of the study.