Risk vs Return

What you'll learn

• ✓Describe the risk-return relationship

Lessons

1. 🎢
   The Coin Flip

   Same math, very different rides
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2. The Iron Law

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3. A Century of Data

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4. Pick the Risk for the Job

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5. Final Boss: Read the Tradeoff

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Sources

All content is drawn from the sources below. We deliberately avoid unverified material.

• SBBI Yearbook (Stocks, Bonds, Bills, and Inflation)
  Ibbotson Associates / Roger G. Ibbotson, annual · data
  Primary US data source for the 20th-century asset class returns used in lessons 3 and 5: cash around 3 percent, long government bonds around 5 percent, large-cap stocks around 10 percent nominal annualized.
• Triumph of the Optimists: 101 Years of Global Investment Returns
  Dimson, Marsh, Staunton, Princeton University Press, 2002 · book
  Cross-country evidence (16 markets from 1900) confirming the same risk ladder used in lessons 2 and 3, and underpinning the equity risk premium discussion.
• The Equity Premium: A Puzzle
  Mehra and Prescott, Journal of Monetary Economics 15 (1985), pp. 145-161 · academic
  Source for the lesson 3 claim that the historical equity risk premium is empirically large (around 5 percent in the US) and hard to fully explain with standard utility-based models.
• Stocks for the Long Run
  Jeremy J. Siegel, McGraw-Hill, multiple editions · book
  Reference for the long-horizon equity outperformance and the time-horizon framing used in lesson 4 (matching risk to the job).
• Investments (chapters 5 and 6, Risk and Return)
  Bodie, Kane, Marcus, McGraw-Hill · book
  Standard textbook treatment of expected return, risk as dispersion, and risk premia. Backbone of the definitions in lessons 1 and 2.