Over a long period, the total risk could still be substantial as what happened from 2001 to 2010. In this case, a “buy-and-hold” strategy could still end up with low return. In contrast, a strategy, like Dollar Averaging, could perform well. The following table provides annual returns from SPY (an ETF that mimics S&P 500 index).

Year	2001	2002	2003	2004	2005	2006	2007	2008	2009	2010
Return	‐0.0710	‐0.1676	0.2532	0.0315	‐0.0061	0.1629	0.0643	‐0.3384	0.1471	0.1812

Suppose you have $10,000 at the beginning of 2001, and a risk-free bond yielded 3%. What would be your total wealth at the end of 2010, and what is your geometric annual return if each of the following strategy is implemented?

1. (a) Strategy A (Buy-and-Hold): Invest the total amount of money in SPY at the beginning of 2001.

2. (b) Strategy B (Market Chasing): Invest everything in SPY if last year’s return is positive; invest only 80% in stock and the rest in the risk-free bond if last year’s return is negative. (Assuming year 2000 is a good year)

3. (c) Strategy C (Dollar-Cost-Averaging): Adding $1000 additional money into your investment in SPY at the beginning of each year. (Assuming you do not have the $10,000 at the beginning, and can only come up with $1000 at the beginning of each year)

4. (d) Strategy D (Mixed): Assuming you have the $10,000 at the beginning, but will only invest $1000 in SPY each year as in part (c). For the rest of the money, you’ll put in the risk-free account that earns 3% interest, and be able to withdraw $1000 to invest in SPY every year.

5. (e) Comparing the above three strategies, what can you say?

Answer rating: 100% (QA)

a Strategy A BuyandHold Invest the total amount of money in SPY at the beginning of 2001 At the end ... View the full answer