Question: The article Rethink Diversification to Raise Returns Cut Risk San
The article “Rethink Diversification to Raise Returns, Cut Risk” (San Luis Obispo Tribune, January 21, 2006) included the following paragraph: In their research, Mulvey and Reilly compared the results of two hypothetical portfolios and used actual data from 1994 to 2004 to see what returns they would achieve. The first portfolio invested in Treasury bonds, domestic stocks, international stocks, and cash. Its 10-year average annual return was 9.85% and its volatility— measured as the standard deviation of annual returns—was 9.26%. When Mulvey and Reilly shifted some assets in the portfolio to include funds that invest in real estate, commodities, and options, the 10-year return rose to 10.55% while the standard deviation fell to 7.97%. In short, the more diversified portfolio had a slightly better return and much less risk. Explain why the standard deviation is a reasonable measure of volatility and why it is reasonable to interpret a smaller standard deviation as meaning less risk.
Answer to relevant QuestionsThe U.S. Department of Transportation reported the accompanying data (see next page) on the number of speeding-related crash fatalities during holiday periods for the years from 1994 to 2003 (Traffic Safety Facts, July 20, ...The standard deviation alone does not measure relative variation. For example, a standard deviation of $1 would be considered large if it is describing the variability from store to store in the price of an ice cube tray. On ...The average playing time of compact discs in a large collection is 35 minutes, and the standard deviation is 5 minutes. a. What value is 1 standard deviation above the mean? 1 standard deviation below the mean? What values ...The paper “Modeling and Measurements of Bus Service Reliability” (Transportation Research : 253– 256) studied various aspects of bus service and presented data on travel times (in minutes) from several different ...Research by the Food and Drug Administration (FDA) shows that acrylamide (a possible cancer-causing substance) forms in high-carbohydrate foods cooked at high temperatures and that acrylamide levels can vary widely even ...
Post your question