Did stocks outperform bonds because they were riskier or longer-term?


These are backward-looking average geometric returns. For example, over the last 60 years, inflation was about 4%, bills earned about 5%, bonds earned about 7%, and stocks earned about 10%. The “term premium” is the difference between bonds and bills. The “risk premium” is the difference between stocks and bonds.

Ergo: The “Ibbotson/CRSP” period from 1926 has the best stock-over-bond performance (risk premium: 4%, term premium: 1%). Other (and especially more recent) periods point to a smaller risk premium and a larger term premium (say, risk premium: 2%, term premium: 2%).

Levi-Welch JFQA 2016

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