Risk equals reward, right? This has been an investment concept for more than a century. The notion implies that every asset class delivers gains that account for their volatility and risk. Bonds (which have default risk) generate modestly better returns than cash, large-cap stocks have delivered better returns than bonds over the long haul, and small-cap stocks,… Read More
Risk equals reward, right? This has been an investment concept for more than a century. The notion implies that every asset class delivers gains that account for their volatility and risk. Bonds (which have default risk) generate modestly better returns than cash, large-cap stocks have delivered better returns than bonds over the long haul, and small-cap stocks, the riskiest asset class of all, are expected to generate the best returns of all, at least for investors who can stomach the wild swings. But is the adage really true? Are you really compensated for risk with better returns? The answer may surprise you. To see whether you are taking on too much risk in search of rewards, let’s turn to Stanford University professor William Sharpe, who devised a handy measure of risk-adjusted returns back in the 1960s. His “Sharpe ratio” is used… Read More