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The Mean–Variance Framework and Long Horizons

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  • Thomas Albrecht

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.

Suggested Citation

  • Thomas Albrecht, 1998. "The Mean–Variance Framework and Long Horizons," Financial Analysts Journal, Taylor & Francis Journals, vol. 54(4), pages 44-49, July.
    • Handle: RePEc:taf:ufajxx:v:54:y:1998:i:4:p:44-49
    DOI: 10.2469/faj.v54.n4.2197
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