The Nature Of Risk And Reward

There is a correlation between asset return and risk. When seeking higher return or reward you normally assume larger risks. We define risk by the volatility, or variability, of an asset's value. Let's compare the return and risk for the three most common asset classes: stocks (S&P 500), bonds (10-yr US Treasury) and cash (90-day T-Bill) from 12/31/71 to 1/31/17.

The annual return for these assets respectively is 10.39%, 7.4% and 4.91%.

The annualized volatility for these assets respectively is 15.2%, 7.1% and 1%.

Note that the inflation rate during this period of time was 4.02%. The inflation adjusted annual return over this period of time is 6.37% for the S&P 500, 3.38% for the 10-yr US Treasury and 0.89% for the 90-day T-Bill.

*Data from St. Louis Federal Reserve and Yahoo Finance.

 

Disclosure:

The information presented here is the opinion of the author and may quickly become outdated and is subject to change without notice. All material presented in this article are compiled from sources believed to be reliable, however accuracy cannot be guaranteed. No person should make an investment decision in reliance on the information presented here.

The information presented here is distributed for education purposes only and is not an offer to buy or sell or a solicitation of an offer to buy or sell any security or participate in any particular trading strategy.

Performance data showing past performance results is no guarantee of future returns.

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