First Look

Before looking closely at the different portfolio returns, we take a look at the big picture. Figure 12.4 shows what happened to $1 invested in these different portfolios at the beginning of 1925. The growth in value for each of the different portfolios over the 75-year period ending in 2000 is given separately (the long-term corporate bonds are omitted). Notice that to get everything on a single graph, some modification in scaling is used. As is commonly done with financial series, the vertical axis is scaled such that equal distances measure equal percentage (as opposed to dollar) changes in values.3

Looking at Figure 12.4, we see that the "small-cap" (short for small-capitalization) investment did the best overall. Every dollar invested grew to a remarkable $6,402.23 over the 75 years. The large-company common stock portfolio did less well; a dollar invested in it grew to $2,586.52.

At the other end, the T-bill portfolio grew to only $16.56. This is even less impressive when we consider the inflation over the period in question. As illustrated, the increase in the price level was such that $9.71 was needed at the end of the period just to replace the original $1.

Given the historical record, why would anybody buy anything other than small-cap stocks? If you look closely at Figure 12.4, you will probably see the answer. The T-bill portfolio and the long-term government bond portfolio grew more slowly than did the stock portfolios, but they also grew much more steadily. The small stocks ended up on top, but as you can see, they grew quite erratically at times. For example, the small stocks were the worst performers for about the first 10 years and had a smaller return than long-term government bonds for almost 15 years.

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