Volatility Lessons. Issue 3 (1st July 2018)

• Record Type: Journal Article
• Authors: Fama, Eugene F.; French, Kenneth R.
• Is Part Of: Financial analysts journal. Volume 74:Issue 3(2018)
• Page Start: 42
• Page End: 53
• Publication Date: 2018-07-01
• Subjects: Investment analysis -- Periodicals; Investment analysis; HW_FM; Periodicals; Electronic journals; 332.6
• DOI: 10.2469/faj.v74.n3.6
• Languages: English
• ISSNs: 0015-198X

Abstract

Abstract : The average monthly premium of the Market return over the one-month T-bill return is substantial, as are average premiums of value and small stocks over Market. As the return horizon increases, premium distributions become more disperse, but they move to the right (toward higher values) faster than they become more disperse. There is, however, some bad news. Even if future expected premiums match high past averages, high volatility means that for the 3- and 5-year periods commonly used to evaluate asset allocations, the probabilities of negative realized premiums are substantial, and the probabilities are nontrivial for 10- and 20-year periods.