Questions: 1. Do you think that stocks become less risky, relative to bonds, as your time horizon is lengthened? If so, why? If not, why not? 2. What are the implications of this article for the measures of risk and risk premiums used in the risk and return models developed
While the stock and bond markets can be risky in the short run, time has a moderating effect on market risk. The longer you hold a stock or bond investment, the lower your chances of losing money, and the greater the odds of earning a return close to the long-term average.
For example, a one-year investment in stocks has historically produced returns
| Holding Period | Best Return | Worst Return |
| 1 Year | +53.9% | -43.3% |
| 5 Years | +23.9% | -12.5% |
| 10 Years | +20.1% | -0.9% |
| 15 Years | +18.2% | +0.6% |
| 20 Years | +16.9% | +3.1% |
| 25 Years | +14.7% | +5.9% |
As you can see, risk can be substantial over short periods. But over longer horizons, the chance of losing money is substantially reduced.
The same principle applies to bonds, though bonds are less risky than stocks. For long-term bonds, it takes ten years before returns are consistently positive; for shorter-maturity bonds, about three years.
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Questions:
1. Do you think that stocks become less risky, relative to bonds, as your time horizon is lengthened? If so, why? If not, why not?
2. What are the implications of this article for the measures of risk and risk premiums used in the risk and return models developed in chapter 3?
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