Campbell & Viceira: The term structure of the risk-return trade off

Question 1

a steepening of the yield curve forecasts an …

Answer 1

increase in the short-term real interest rate next period

Question 2

excess stock returns

Answer 2

lagged nominal short-term interest rate and the dividend price ratio are the only variables that are significant

Question 3

excess bond returns

Answer 3

yield spread is the only variable that is significant

Question 4

excess stock returns (negative coefficient) also help to predict ..

Answer 4

excess bond returns

Question 5

nominal t-bill rate is predicted by the ..

Answer 5

lagged nominal yield (coefficient implies persistent dynamics)

Question 6

an implication of asset return predictability is that ..

Answer 6

risk varies across investment horizons

Question 7

long-horizon returns on stocks are significantly ..

Answer 7

less volatile than their short-horizon returns

Question 8

result of mean reverting-behavior in stock returns induced by the predictability of stock returns from the dividend yield

Answer 8

low dividend yields tend to coincide with high current stock returns and low dividend yield forecast for future stock performance

Question 9

real returns on both t-bills and the variable-maturity bond exhibit ..

Answer 9

mean aversion -> their real return volatility increases with investment horizon

Question 10

the increase in return volatility at long horizons is particularly large for the ..

Answer 10

variable-maturity bond whose initial maturity is equal to the holding period -> risk of the bond is the risk of cumulative inflation over the investment horizon

Question 11

at very long horizons, holding long-term nominal bonds is ..

Answer 11

even riskier than holding stocks

Question 12

at intermediate horizons, the most important variable is ..

Answer 12

the short term nominal interest rate (yield on t-bills)

-> if the t-bill yield increases, bond returns fall at once; stock returns react more slowly

Question 13

at long horizons, the most important variable is ..

Answer 13

the dividend-price ratio -> predicts high returns on stocks and low returns on bonds

Question 14

decades with high (low) dividend-price ratio will have ..

Answer 14

high (low) stock returns and low (high) bond returns

Question 15

inflation creates stock market misplacing that can have large effects at ..

Answer 15

intermediate horizons but eventually corrects itself

Question 16

in the very long run, stocks are ..

Answer 16

real assets and do hedge inflation risk

Question 17

at any given level, the mean-variance efficient frontier is the ..

Answer 17

set of buy-and-hold portfolios with minimum risk (or variance) per expected return

Question 18

when the term structure of risk is flat, the efficient frontier is ..

Answer 18

the same at all horizons

Question 19

when expected returns are time varying, and the term structure of risk is not flat, efficient frontiers may be ..

Answer 19

different at different horizons

Question 20

Global minimum variance portfolio (GMV)

Answer 20

portfolio with the smallest variance of risk in the efficient set

Question 21

the standard practice of considering t-bills the riskless asset works well at ..

Answer 21

short horizons but can be deceptive at long horizons

Question 22

the variance and correlation structure of real returns to assets changes dramatically by ..

Answer 22

investment horizon -> reflects the underlying changes in stock market risk, inflation risk, and real interest rate risk at different horizons

Question 23

mean reversion in stock returns decreases the volatility per ..

Answer 23

period of real stock returns

Question 24

reinvestment risk increases the volatility per ..

Answer 24

period of real t-bill returns

Question 25

inflation risk increases the volatility per ..

Answer 25

period of the real return on long-term nominal bonds held to maturity

Question 26

stocks and bonds exhibit relatively low positive correlation at ..

Answer 26

both ends of the term structure of risk but are highly positively correlated at intermediate horizons

Question 27

inflation is negatively correlated with bond and stock returns at ..

Answer 27

short horizons, but positively correlated at long horizons

Question 28

asset allocation recommendations based on short term risk and return may ..

Answer 28

not be adequate for long horizon investors

Question 29

at short horizons, the GMV portfolio consists almost exclusively of ..

Answer 29

t-bills but at long horizons a portfolio consisting of long-term bonds and stocks has lower risk

Question 30

the tangency portfolio of bonds and stocks becomes increasingly biased towards ..

Answer 30

stocks as the horizon increases

Question 31

the idea of a term structure of the risk-return trade-off is valid only for

Answer 31

buy-and-hold investors who make one-time asset allocation decisions

Question 32

if interest rates and expected asset returns change over time, risk averse long-term investors should ..

Answer 32

also be interested in protecting (hedging) their long-term spending programs against unexpected deterioration in investment opportunities

Question 33

strategic asset allocation (SAA) portfolios

Answer 33

combination of short-term mean-variance efficient portfolio that reflects short-term considerations and a portfolio that reflects long-term, dynamic hedging considerations (inter temporal hedging portfolio)