bre44380_ch07_162-191.indd 163 09/02/15 04:11 PM
Chapter 7 Introduction to Risk and Return 163maturing in three months. However, the investor cannot lock in a real rate of return: There is
still some uncertainty about inflation.
By switching to long-term government bonds, the investor acquires an asset whose price
fluctuates as interest rates vary. (Bond prices fall when interest rates rise and rise when inter-
est rates fall.) An investor who shifts from bonds to common stocks shares in all the ups and
downs of the issuing companies.
Figure 7.1 shows how your money would have grown if you had invested $1 at the end of
1899 and reinvested all dividend or interest income in each of the three portfolios.^3 Figure 7.2
is identical except that it depicts the growth in the real value of the portfolio. We focus here
on nominal values.
Investment performance coincides with our intuitive risk ranking. A dollar invested in the
safest investment, Treasury bills, would have grown to $74 by the end of 2014, barely enough◗ FIGURE 7.1
How an investment of $1 at
the end of 1899 would have
grown by the end of 2014,
assuming reinvestment of
all dividend and interest
payments.
Source: E. Dimson, P. R. Marsh, and M.
Staunton, Triumph of the Optimists: 101
Years of Investment Returns (Princeton,
NJ: Princeton University Press, 2002),
with updates provided by the authors.End of year1101001,00010,000100,000
$38,255$278
$74Equities
Bonds
BillsDollars, log scale189919041909191419191924192919341939194419491954195919641969197419791984198919941999200420092014◗ FIGURE 7.2
How an investment of $1 at
the end of 1899 would have
grown by the end of 2014,
assuming reinvestment of all
dividend and interest pay-
ments. Compare this plot
with Figure 7.1, and note
how inflation has eroded the
purchasing power of returns
to investors.
Source: E. Dimson, P. R. Marsh, and M.
Staunton, Triumph of the Optimists: 101
Years of Investment Returns (Princeton,
NJ: Princeton University Press, 2002),
with updates provided by the authors.
End of year$1,396$10.1
$2.7Equities
Bonds
BillsDollars, log scale0.11101001,00010,000189919041909191419191924192919341939194419491954195919641969197419791984198919941999200420092014(^3) Portfolio values are plotted on a log scale. If they were not, the ending values for the common stock portfolio would run off the top
of the page.