FinanceLesson 2 of 2 in the course Historical Performance of US Markets

Historical Stock Returns, Risk, and Long-Term Investment Decisions

5 flashcards · 5 quiz questions · 5 match pairs · 5 fill-in sentences · English

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Summary

This lesson introduces the main indexes used to describe US equity markets and explains how historical return patterns help investors think about risk.

The Dow Jones Industrial Average (DJIA), often called the Dow 30, and the S&P 500 are among the most frequently quoted stock market indexes. Both track groups of large-capitalization companies, and their changes tend to be highly correlated.

All flashcards

Standard deviation of returns
A measure of how dispersed returns are around their average; higher values indicate greater historical variability.
Market timing
Trying to move in and out of the market to avoid declines or capture gains.
Asset allocation
The decision about how to distribute a portfolio among broad categories such as stocks and bonds.
International diversification
Spreading investments across countries whose returns may not move in the same way.
Buffett's long-term investing principle
Understand the business behind an investment and consider it with a long time horizon.

Quiz questions

  1. From 1981 through 2020, which listed asset class had both the highest average annual return and the highest standard deviation?Answer: Large-company stocks
  2. What does asset allocation determine, and why can it strongly affect portfolio outcomes?Answer: It distributes a portfolio among broad asset classes, whose different long-run return profiles can affect outcomes substantially.
  3. From 1980 through 2020, how much higher was the Wilshire US Small-Cap Index's annual compound return than the Wilshire US Large Cap Index's?Answer: 0.31 percentage points
  4. A $10,000 S&P 500 index-fund investment from 1980 to mid-2020 would have ended at $313,377 if it missed the ten best-performing days. What was its stated ending value if it stayed invested throughout?Answer: $697,421
  5. Why can investing in foreign equity markets diversify a portfolio?Answer: Returns from different countries do not necessarily move in the same way.

Based on Principles of Finance by Julie Dahlquist, Rainford Knight (OpenStax), licensed CC BY 4.0. Adapted into a summary, flashcards and quizzes.

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