Investments, tenth edition

BondsT–bills

Large

cap

Small

cap

1–year periods

Best

Average

Worst

zoom in

adjust for inflation

Range of annualized returns

over 1–year periods,

 The graph starts out showing results for investments 

held over one-year periods. There’s no doubt about it: Over 

such short intervals, small-cap stocks are definitely the risk-

iest bet. 

 But what about investing for more than a year? If you 

move the slider at the bottom right of the graph, you can 

see the range of returns for longer time periods. Even 

investing for two years instead of one cuts your risk sig-

nificantly. As the length of time increases, the volatility of 

equities decreases sharply—so much so that you may need 

to click the “zoom in” button to get a closer view. Over 

10-year periods, government bonds look safer than large-

cap equities on the downside. Click the “adjust for infla-

tion” box, however, and you’ll see that bond “safety” can 

be illusory. Inflation has an uncanny ability to erode the 

value of securities that don’t grow fast enough. 

 Now move the slider all the way to the right to see 

the results of investing for 20-year intervals. Adjusting 

for inflation, the best 20-year gain a portfolio of long-

term Treasury bonds could muster is much lower than 

that achieved by small- and large-cap stocks. And contrary 

to popular belief, over their worst 20-year period, long-

term bonds actually  lost  money when adjusted for infla-

tion. Meanwhile, small-cap investors still had gains over a 

20-year-period, even when stocks were at their worst. 

 Source: Abridged from ”Time vs. Risk,” SmartMoney.com, July 31, 

2010. © 2013 Dow Jones & Company, Inc. Used with permission via 

icopyright. 

 WORDS FROM THE STREET 

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  C H A P T E R  

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  Risk, Return, and the Historical Record 

161

return plus jumps that generate deviation from normality. The jump process itself can be 

decomposed to an aggregation of small jumps plus large jumps that dominate the tails of 

the distributions.  

25

  

  

 We expect that before long practitioners will be able to purchase output of such research 

and obtain accurate risk parameters of a large array of investments. These will add rel-

evance to the insights and investment practices described in future chapters.