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Return (financial)
When looking at a historical chart of risk vs. return, we see the following data (from 1920's - 2000's)
Large company stocks - (average return) = 12%, (standard deviation) = 21%
Small company stocks - (average return) = 17%, (standard deviation) = 33%
Long term corporate bonds - (average return) = 6.2%, (standard deviation) = 8.7%
Long term government bonds - (average return) = 5.8%, (standard deviation) = 9.2%
risk-free rate (T-bills) = 3.8%
inflation = 3.1%
to figure out the risk-premium, just subtract the risk-free rate from the average return.
Note:
So, investments in T-bills was the safest in that they had the least risk, as shown in the lowest standard deviation of returns. But, the return was just barely higher than inflation, so your real rate of return was minimal.
How to read this data:
By looking at the standard deviation of 21% of stocks, and the average return of 12%, then we would expect that 68% of the time (if we assume a normal distribution), we would have returns between -9% and +33%. The probability of landing within two standard deviations is 95%, meaning between -30% and +54%.
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