chapter 6

The risk of equity markets

Understanding the risk you take to get returns

It seems that every pre-bubble period is characterised by an abundance of changing paradigm stories or that ‘this time it’s different’, only for history to repeat itself and markets falling. What follows are the inevitable stories about people who saw it coming and those who predict further gloom.

While nobody really knows what will happen to the stock markets, we can make some observations about the risks we take in investing in them. Figure 6.1 shows world and US equity market risk over the past 25 years, illustrated as the trailing 12-month standard deviation (SD) of the returns (explained below).

What you immediately notice is that the risk moves around ...

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