Characteristics of Long-Run Return and Risk: A Unified Performance Metric

Abstract

It is well documented in the literature that long-run asset prices do not follow the random walk, and their returns are not independent and identically-distributed (i.i.d.) over time. But how can this notion – long-run returns and volatilities being horizon dependent - be incorporated into formal pricing models? This paper proposes a unified risk-adjusted return metric that is applicable to both private assets and public securities. Since such metric is based on a pair of empirically determined return and risk characteristic lines that depict the horizon impact on return and volatility, the resulted performance metric is rooted in empirical evidence rather than theoretical assumptions. Empirical results suggest that long-run asset performance cannot be adequately measured by single-period return and volatility. Rather, prudent long-run investment decision must give careful consideration of the anticipated holding period and proper understanding of the long-run return and risk characteristics.

Keywords: investment performance metric, real estate, financial assets

JEL Classification: R51, G12