Question

Evidence from the 50-year period from 1950 to 1999 indicates that returns and risk (as measured by the standard deviation of returns) are positively related.

Answer 1

We need to look at the data on returns, variances and standard deviation of various investment choices available with investors over the 50-year period from 1950 to 1999.

Reference is made to the following items of the text book: Chapter 8; Brooks IM, 2nd edition:

• Table 8.2
• Figure 8.3

On examination of Table 8.2 and Figure 8.3, over the past 5 decades (1950-1999) following conclusions can be made:

• Government bonds (B) have higher return and higher risk than treasury bonds (T)
• L have higher returns and risk than T
• And S have higher return and risk than L

Thus we can conclude that riskier the investment groups, higher is the earned returns and vice-versa. Hence, evidence from the 50-year period from 1950 to 1999 certainly indicates that returns and risk (as measured by the standard deviation of returns) are positively related.