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 ranging from +53.9% to -43.3%. Over ten- year periods, however, returns have varied from -0.9% per year for the worst ten years to +20.1% per year for the best ten years. Holding Period 1 Year 5 Years 10 Years 15 Years 20 Years 25 Years Best Return +53.9% +23.9% +20.1% +18.2% +16.9% +14.7% Worst Return -43.3% -12.5% -0.9% +0.6% +3.1% +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.
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 ranging from +53.9% to -43.3%. Over ten- year periods, however, returns have varied from -0.9% per year for the worst ten years to +20.1% per year for the best ten years. Holding Period 1 Year 5 Years 10 Years 15 Years 20 Years 25 Years Best Return +53.9% +23.9% +20.1% +18.2% +16.9% +14.7% Worst Return -43.3% -12.5% -0.9% +0.6% +3.1% +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.
Advanced Engineering Mathematics
10th Edition
ISBN:9780470458365
Author:Erwin Kreyszig
Publisher:Erwin Kreyszig
Chapter2: Second-order Linear Odes
Section: Chapter Questions
Problem 1RQ
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Sh4
Transcribed Image Text: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 ranging from +53.9% to -43.3%. Over ten-
year periods, however, returns have varied from -0.9% per year for the worst ten years to +20.1% per year for the best ten
years.
Holding Period
1 Year
Best Return
+53.9%
+23.9%
+20.1%
+18.2%
20 Years
+16.9%
25 Years
+14.7%
As you can see, risk can be substantial over short periods. But over longer horizons, the chance of losing money i
substantially reduced.
5 Years
10 Years
Worst Return
-43.3%
-12.5%
-0.9%
+0.6%
+3.1%
+5.9%
15 Years
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.
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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