How Investment Risk Evolves with Horizon

27 Pages Posted: 19 Oct 2018

See all articles by Geoff Warren

Geoff Warren

Australian National University (ANU) - Research School of Finance, Actuarial Studies and Statistics

Date Written: September 26, 2018

Abstract

This paper investigates how the nature of risk changes as investment horizon lengthens, and what it means for investors. Accumulated wealth is analyzed in terms of four drivers: expected return, cash flow innovations, discount rate innovations, and reinvestment rates. This perspective highlights how investors with short horizons are justified in primarily focusing on the drivers of price fluctuations, which include changes in both discount rates and market expectations for future cash flows. In contrast, long-term investors should pay particular attention to the initial long-term expected return being offered by the market, whether expected cash flows will be actually realized, and reinvestment opportunities. How the relative riskiness of equities, bonds and cash may vary with horizon is also discussed, including highlighting why fixed income may not be a low risk asset class over longer horizons.

Keywords: investment horizon, investment risk, investment process

JEL Classification: G11, G23

Suggested Citation

Warren, Geoffrey J., How Investment Risk Evolves with Horizon (September 26, 2018). Available at SSRN: https://ssrn.com/abstract=3256007 or http://dx.doi.org/10.2139/ssrn.3256007

Geoffrey J. Warren (Contact Author)

Australian National University (ANU) - Research School of Finance, Actuarial Studies and Statistics ( email )

CBE Building 26C
Kingsley Sreet, Acton
Canberra, ACT 0200
Australia

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
54
Abstract Views
314
rank
389,121
PlumX Metrics