The Mean–Variance Framework and Long Horizons

Thomas Albrecht

Financial Analysts Journal, 1998, vol. 54, issue 4, 44-49

Abstract: Some have argued that low-risk investments grow more attractive at longer investment horizons as their Sharpe ratios improve relative to high-risk investments. This article rejects this view by showing that the long-term standard deviation of returns can be misleading as an indicator of risk: Because of compounding, investments with identical standard deviations can have entirely different long-term risk characteristics even if all instantaneous investment returns are normally distributed. Furthermore, even if an individual investor accepts standard deviation of long-term returns as a measure of long-term risk, the relative attractiveness of high-risk investments can be kept constant by proper portfolio adjustments.

Date: 1998
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DOI: 10.2469/faj.v54.n4.2197

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