The price of underestimating the long run
For decades, investors and academics have assumed that a strategy's one-month risk can simply be scaled up to estimate its risk over several years. 160 years of UK stock market data show that this logic doesn't hold.
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Investing in small or undervalued companies is one of the most popular strategies in finance, and today it moves more than two trillion dollars worldwide. But is the risk of this strategy the same whether you hold it for one year or five? In this episode of Risk and Return, we put one of factor investing's most widespread assumptions to the test.
Together with Jan Sandoval, assistant professor in the Department of Economics, Finance and Accounting at Esade and member of the Group for Research in Economics and Finance (GREF), we look at 160 years of individual UK stock data to understand how risk in the so-called size and value factors actually behaves across different investment horizons. The conclusion: the long-term risk of these strategies is significantly higher than standard practice suggests, and that gap comes with a measurable cost for those who ignore it.
Hosted by professor Omar Rachedi, Risk and Return brings together leading academics and practitioners to cut through the jargon and explore how markets, businesses, and policies shape our world.