On the Risk of Stocks in the Long Run

Harvard Business School Working Paper No 95-013

11 Pages Posted: 8 Jun 2001

Date Written: December 1994

Abstract

This paper examines the proposition that investing in common stocks is less risky the longer an investor plans to hold them. If the proposition were true, then the cost of insuring against earning less than the risk-free rate of interest should decline as the length of the investment horizon increases. The paper shows that the opposite is true even if stock returns are "mean-reverting" in the long run. The case for young people investing more heavily in stocks than old people cannot, therefore, rest solely on the long-run properties of stock returns. For guarantors of money-fixed annuities, the proposition that stocks in their portfolio are a better hedge the longer the maturity of their obligations is unambiguously wrong.

JEL Classification: G11

Suggested Citation

Bodie, Zvi, On the Risk of Stocks in the Long Run (December 1994). Harvard Business School Working Paper No 95-013, Available at SSRN: https://ssrn.com/abstract=5771 or http://dx.doi.org/10.2139/ssrn.5771

Zvi Bodie (Contact Author)

Boston University ( email )

12 Salisbury Road
Brookline, MA
United States
617 306 5556 (Phone)

HOME PAGE: http://www.zvibodie.com

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