Why Cumulative Returns Can Fall Below the Risk-Free Rate

Summary

The document addresses why a stock’s cumulative return can fall below the risk-free return, even when investors expect equities to earn a premium over time. Its explanation is that risky assets can have poor outcomes over particular periods. The equity premium concerns average excess returns, not a guarantee that every asset will outperform the risk-free rate at every moment.

The answer is conceptual and does not analyze the referenced stock data, specify a measurement period, or distinguish cumulative return from annualized or expected return. It therefore explains why underperformance is possible, but does not diagnose the particular chart or establish whether the stated risk-free benchmark is appropriate. The central takeaway is to interpret an expected average premium as a long-run or population-level claim, rather than a floor on realized returns.

Key ideas

• Risky assets can underperform the risk-free rate over particular periods.
• A positive average equity premium does not guarantee positive excess returns for every asset at every time.
• The explanation is general and does not diagnose the specific stock chart or its measurement choices.

Tags

# What does it mean when cumulative return intersects or is below the risk free rate?


# What does it mean when cumulative return intersects or is below the risk free rate?












I am learning about the basics of Risk Adjust Performance when I stumble upon something odd with some sample data about UPS. Clearly, the UPS stock's cumulative return is underperforming the market; however, what I don't understand is how intersects the risk-free return that about 4.4%.

What exactly does it mean for a stock's cumulative return to dip below the risk-free market?

## Answer by Stéphane (score 1)

https://quant.stackexchange.com/a/51332

In essence, risky assets can perform awfully bad some of the time. What the theory says, intuitively, is that the distinct possibilities of large swings should, on average, command a commensurate reward.

In other word, the equity premium is a statement about average excess returns being positive. That doesn't mean that all excess returns on all assets at all times will be positive.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.