STANDARD MEASURES OF RISK
The risk—defined as the standard deviation of average real annual re-
turns—for stocks, bonds, and bills based on the historical sample of over
200 years is displayed in Figure 2-3. Standard deviation is the measure of
risk used in portfolio theory and asset allocation models.
Although the standard deviation of stock returns is higher than for
bond returns over short-term holding periods, once the holding period
increases to between 15 and 20 years, stocks become less risky than
bonds. Over 30-year periods, the standard deviation of a portfolio of eq-
uities falls to less than three-fourths that of bonds or bills. The standard
deviation of average stock returns falls nearly twice as fast as for fixed-
income assets as the holding period increases.
28 PART 1 The Verdict of History
FIGURE 2–2
Average Total Real Returns after Major Twentieth-Century Market Peaks ($100 Initial Investment)