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Which are Riskier: stocks or bonds?

The answer has varied over the past 150 years; it also depends upon the CPI. Are investors now underrating both asset classes’ risks?

It’s one of the most basic questions that investors face. Which are riskier: stocks or bonds? The answer is crucial because, as AQR put it (“A Changing Stock-Bond Correlation: Drivers and Implications,” Q1-2023), the “relationship between stock and bond returns is a fundamental determinant of risk in traditional portfolios.”

If the linkage is positive (that is, the better are bonds’ returns, the bigger are stocks’), then portfolios which comprise mostly stocks, or a mixture of stocks and bonds, will suffer when bonds’ returns fall. If, however, it’s negative or absent (such that an increase of bonds’ results is associated with a decrease of stocks’ results, or bonds’ returns don’t affect stocks’) then over the long term portfolios that comprises, say, 60% stocks and 40% bonds will likely outperform equities-only portfolios.

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All prices and analysis at 11 December 2023.  This document was originally published on Livewire Markets website on 11 December 2023. This information has been prepared by Leithner & Company Ltd and uses data originally compiled by Robert Shiller for his book Irrational Exuberance (Princeton University Press, 1st ed., 2001) and updated thereafter. 

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Livewire Markets

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