Chapter 2
Long-Run Returns on Stocks and Bonds
Investors have a variety of assets in which they can invest, from private equity to mortgages to real estate. Yet it’s best to begin a study of investments by focusing on the simplest of assets, stocks and bonds. The history of stock and bond returns extends much further back than any other assets. And the quality of the return data for stocks and bonds, at least government bonds, far exceeds the quality of return data for many alternative assets.
Most studies of U.S. markets rely on the well-known SBBI data set (©Morningstar) originally developed by Ibbotson Associates. The data set begins in 1926 when the University of Chicago’s CRSP data set, on which it is based, also begins. The SBBI data set consists of six assets, large company and small company U.S. stocks, long-term and medium-term U.S. government bonds, U.S. corporate bonds, and U.S. Treasury bills. An inflation series based on the consumer price index is also reported. SBBI publishes an annual yearbook, Ibbotson SBBI, Classic Yearbook—Market Results for Stocks, Bonds, Bills and Inflation, that contains valuable analyses of these six markets.
This chapter will use the SBBI data set, but will focus on the post-war period beginning in 1951 rather than the entire period extending back to 1926. Choosing an historical period over which to study returns involves a trade off between two factors. On the one hand, the longer the data set, the more robust are any statistical inferences ...
