Campbell & Viceira: The term structure of the risk-return trade off Flashcards
a steepening of the yield curve forecasts an …
increase in the short-term real interest rate next period
excess stock returns
lagged nominal short-term interest rate and the dividend price ratio are the only variables that are significant
excess bond returns
yield spread is the only variable that is significant
excess stock returns (negative coefficient) also help to predict ..
excess bond returns
nominal t-bill rate is predicted by the ..
lagged nominal yield (coefficient implies persistent dynamics)
an implication of asset return predictability is that ..
risk varies across investment horizons
long-horizon returns on stocks are significantly ..
less volatile than their short-horizon returns
result of mean reverting-behavior in stock returns induced by the predictability of stock returns from the dividend yield
low dividend yields tend to coincide with high current stock returns and low dividend yield forecast for future stock performance
real returns on both t-bills and the variable-maturity bond exhibit ..
mean aversion -> their real return volatility increases with investment horizon
the increase in return volatility at long horizons is particularly large for the ..
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
at very long horizons, holding long-term nominal bonds is ..
even riskier than holding stocks
at intermediate horizons, the most important variable is ..
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
at long horizons, the most important variable is ..
the dividend-price ratio -> predicts high returns on stocks and low returns on bonds
decades with high (low) dividend-price ratio will have ..
high (low) stock returns and low (high) bond returns
inflation creates stock market misplacing that can have large effects at ..
intermediate horizons but eventually corrects itself
in the very long run, stocks are ..
real assets and do hedge inflation risk
at any given level, the mean-variance efficient frontier is the ..
set of buy-and-hold portfolios with minimum risk (or variance) per expected return
when the term structure of risk is flat, the efficient frontier is ..
the same at all horizons
when expected returns are time varying, and the term structure of risk is not flat, efficient frontiers may be ..
different at different horizons
Global minimum variance portfolio (GMV)
portfolio with the smallest variance of risk in the efficient set
the standard practice of considering t-bills the riskless asset works well at ..
short horizons but can be deceptive at long horizons
the variance and correlation structure of real returns to assets changes dramatically by ..
investment horizon -> reflects the underlying changes in stock market risk, inflation risk, and real interest rate risk at different horizons
mean reversion in stock returns decreases the volatility per ..
period of real stock returns
reinvestment risk increases the volatility per ..
period of real t-bill returns
inflation risk increases the volatility per ..
period of the real return on long-term nominal bonds held to maturity
stocks and bonds exhibit relatively low positive correlation at ..
both ends of the term structure of risk but are highly positively correlated at intermediate horizons
inflation is negatively correlated with bond and stock returns at ..
short horizons, but positively correlated at long horizons
asset allocation recommendations based on short term risk and return may ..
not be adequate for long horizon investors
at short horizons, the GMV portfolio consists almost exclusively of ..
t-bills but at long horizons a portfolio consisting of long-term bonds and stocks has lower risk
the tangency portfolio of bonds and stocks becomes increasingly biased towards ..
stocks as the horizon increases
the idea of a term structure of the risk-return trade-off is valid only for
buy-and-hold investors who make one-time asset allocation decisions
if interest rates and expected asset returns change over time, risk averse long-term investors should ..
also be interested in protecting (hedging) their long-term spending programs against unexpected deterioration in investment opportunities
strategic asset allocation (SAA) portfolios
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)
