Here is the table again showing the long-term returns and risks of the major ass

Here is the table again showing the long-term returns and risks of the major asset classes from 1926 – 2018.
AssetGeometric Mean (%)Standard Deviation %
Large-Cap Stocks10.0%19.8%
Small-Cap Stocks11.8%31.6%
Long-term Corporate Bonds5.9%8.4%
Long-term Government Bonds5.5%9.8%
Intermediate-term Government Bonds5.1%5.6%
U.S. Treasury Bills3.3%3.1%
Inflation2.9%4.0%
Source: Duff and Phelp, 2019 SBBI Yearbook Stocks, Bonds, Bills, and Inflation, Roger G. Ibbotson.
Based on the table above, please share some of your thoughts and insights on how a prudent investor should invest a portfolio for a long time frame (20 years+).
1. How would you allocate among the asset classes listed above? Please use full percentage points.
2. Based on your chosen allocation, what would your expected average annual return be over the long-term?
Here is an example of how to do that calculation:
In this example, I chose a portfolio of 50% Large-cap stocks, 30% Small-cap stocks and 20% Intermediate Gov bonds. You would basically multiply the percentage allocation by the expected return for each asset class and then sum them up for your expected return.
Asset ClassAllocationExp ReturnAlloc X Exp Rtn
Large Cap Stocks0.510.0%0.05
Small Cap Stocks0.311.8%0.0354
Intermediate Term Gov Bds0.25.1%0.0102
1.09.6%
So, the long-term expected average annual return for this example portfolio would be 9.6%.
3. Would you use this same allocation if your time horizon was only 5 years? Why or why not?
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REPLY TO ( TWO separate replys )
1. I would allocate my portfolio as follows:
40% Large-Cap Stocks
30% Small-Cap Stocks
10% Long-Term Corporate Bonds
10% Long-Term Government Bonds
10% Intermediate-Term Government Bonds
2. My expected average annual return would be 9.19%.
4% Large-Cap Stocks
3.54% Small-Cap Stocks
.59% Long-Term Corporate Bonds
.55% Long-Term Government Bonds
.51% Intermediate-Term Government Bonds
3. No, I would not use the same allocation for a 5-year time horizon. I would allocate more to the asset classes with lower standard deviations like bonds and treasury bills. This is because when you have a longer time horizon you have a greater risk tolerance, but with a shorter time horizon you don’t have as much risk tolerance. Therefore, I would want to allocate more to investments that wouldn’t have so much variability.
2ND REPLY
1. How would you allocate among the asset classes listed above? Please use full percentage points.
Large cap stocks 50%
Small cap stocks 30%
Government bonds 10%
Corporate bonds 10%
2. Based on your chosen allocation, what would your expected average annual return be over the long-term?
Large cap stocks 0.05
Small cap stocks 0.0354
Government bonds 0.0051
Corporate bonds 0.0051
The long-term expected average annual return for this example portfolio would be 9.56%
3. Would you use this same allocation if your time horizon was only 5 years? Why or why not?
– No, I personally would not use the same allocation if my time horizon was only 5 years. I would avoid stocks and allocate more to asset classes with lower standard deviations, such as bonds and treasuries. Even though stocks would also benefit from periods of high inflation, I would still be careful due to the shorter time. That being said, there is less time for risk tolerance.