Uses of the Model

As you can see both from the table and the chart, this type of analysis provides a very compelling comparison of the behavior of the different asset classes over time. For example, it is clear that despite all the ups and downs in the individual years, large-cap stocks provide an excellent return over the period: a $1 investment grew to $13.35 by the end of the period. Small-cap stocks and bonds closely matched each other, but both trailed large-cap stocks.

This type of presentation is so compelling that it is easy to get misled and fail to recognize the risks inherent in these investments. It is also important to remember that choosing different periods is likely to lead to different conclusions.

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