Given your risk tolerance, and your need to diversify, explain how the Selected Realized Returns (19262013) page 269 and the Effects of Portfolio Risk for Average Stocks will impact your future investment decisions and why.

The table accompanying this box summarizes the historical trade-off between risk and return for different classes of investments from 1926 thorugh 2013. As the table shows, those assets that produced the highest average returns also had the highest standard deviations and the widest ranges of returns. For example, small-company stocks had the highest average annual return, 16.9%, but the standard deviation of their returns, 32.3%, was also the highest. By contrast, U.S. Treasury bills had the lowest standard deviation., 3.1%, but they also had the lowest average return, 3.5%. Although there is no guarantee that history will repeat itself, the returns and standard deviations observed in the past are often used as a starting point for estimating future returns.

Selected Realized Returns, 1926-2013:

Average Return Standard Deviation

Small-Company Stocks 16.9% 32.3%

Large Company stocks 12.1 20.2

Long term corporate bonds 6.3 8.4

Long-term government bonds 5.9 9.8

US Treasury Bills 3.5 3.1