Long-Term Risk Premia and the Case for Diversified Risk Asset Exposure
Summary
This short article uses the long-run nominal growth of US stocks and bonds as a starting point for discussing risk premia. It reports that stocks rose 48,000 times in value and bonds 300 times from 1900 to the article’s present. Its explanation is that investors may earn compensation for holding assets exposed to disappointments in economic growth, inflation, and interest rates. A diversified long portfolio across stocks, bonds, and other risk assets is presented as a way to seek those rewards while reducing portfolio volatility through diversification.
The argument for persistence rests on an economic and behavioural rationale: investors willing to bear risks others avoid may receive compensation, and that willingness can make the premia difficult to eliminate through competition. The article also refers to empirical evidence across time and asset classes, but offers little detail about sources, inflation adjustment, drawdowns, or implementation. Its historical nominal figures alone do not establish future returns or show that a particular trading strategy can capture the premia robustly.
Key ideas
- Long-run historical nominal returns for US stocks and bonds motivate the risk premia discussion.
- Risk premia are framed as compensation for bearing exposure to economic, inflation, and interest-rate disappointments.
- Diversifying long exposure across risk assets may reduce portfolio volatility.
- The article argues that economic and behavioural incentives support persistence of some premia.
- Historical growth figures do not establish future performance or a robust implementation.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.