Talk:Risk and return

PURPOSE OF ARTICLE

The purpose of this article (page) is to provide an online reference to investment risk and reward as presented in investment textbooks, and supplemented by less academic investment books, especially those written by Boglehead authors (e.g., Bogle, Larimore et al, Swedroe, W. Bernstein, Ferri). The intent is not to promote Boglehead investment philosophy (or anything else), although much of BH investment philosophy is based on standard finance theory, so there should be no conflict.

STYLE

The intended style of the article is Wikipedia style, as opposed to tutorial or book style; e.g., the use of personal pronouns is avoided. The intention is to base everything on credible sources, as defined by Wikipedia policy, and not interject opinions of the authors. This should minimize debate about the actual content. Obviously contradictory points of views are fine (actually encouraged) as long as they are based on credible sources. --Kevin M 16:10, 2 April 2012 (CDT)

There is no reason given for explaining the drop in the 90-day return from 1% to -2%. The concept of Duration needs to be introduced (or at least referenced).

"Figure 2 illustrates the longer-term uncertainty of real returns on 90-day T-Bills. Also, note that the relative certainty of return does not mean that the real return necessarily is positive. It may be known with certainty that a 90-day T-Bill will earn a nominal return of 1% over its 90-day term. However if inflation over the 90-day term is expected to be 3%, the relatively certain expected real return is -2%."

--LadyGeek 15:44, 12 April 2012 (CDT)


 * The duration of a short term T-bill is so short that changes in interest rates have very little influence on the price of the T-bill, and even in those instances where a very large increase in rates would temporarily nudge the price lower, an investor only needs to hold the T-bill for the few days remaining to maturity to receive the entire original principal. What the example clearly states is that the T-bill will provide its nominal return, but if inflation unexpectedly rises during the term of the bill, the real return will be reduced. In other words, an investor purchases a 90 day T-bill yielding a 1% annualized yield. At the time of purchase the inflation rate is 0.5% annualized. The next month, the Labor department announces that inflation has increased to 3.0% annualized; and announces it remains at 3% the following month. The investor in this instance has earned his promised 1% annualized return; but the real return is -2% annualized. --Blbarnitz 16:10, 12 April 2012 (CDT)

Thanks. I did not know the time period that duration was significant. The scenario helped to explain what I missed.

To avoid confusion, would it help to show expected return with a more formal notation? E.g. $$E$$xpected return (using the math symbol $$E$$ for clarity)

--LadyGeek 17:03, 12 April 2012 (CDT)