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Posted on Jul 11, 2024

The figure below was taken from a Module 3 ppt slide and shows the returns of various asset classes ranked from highest to lowest during

The figure below was taken from a Module 3 ppt slide and shows the returns of various asset classes ranked from highest to lowest during each year from 2000 to 2017. Each asset class is represented by a different color. For example, the white box shows cash returns; the light green box shows commodity returns; the dark blue box shows S&P 500 returns and so on.

Recall that one of the implications of no free lunch is the risk vs. return trade-off, where higher risk assets have higher expected returns and lower risk assets have lower expected returns. If this were to hold true each year, one would expect returns of riskier assets to rank amongst highest each year and returns less risky assets to rank amongst the lowest.

The color pattern in the figure below is random. Meaning that in any given year, returns of less risky assets may or may not exceed that of higher risk assets. For example, in 2000, 2001 & 2008, US Treasury bonds & cash (less risky assets) had higher returns than that of the S&P 500 & MSCI-EAFE (higher risk assets).

Reconcile this phenomenon with the risk vs. return trade-off. Does this violate no free lunch? Explain.

image text in transcribed

2000 2004 2005 2006 2007 2009 2010 2012 2013 2014 2015 2016 2017 2001 2002 2003 US Commodities MSO EM Trans 56 61 2011 US Tres MSC EM Commodities 31 SAP 500 2008 US Treasures 14.05 REITS 3205 SAP SOO MSCI EM 34.55 REITS 3755 SAP 500 MSCI EM 790% Gold 292 REITS 23 GHY MSCI EM 14 37 98% US Treasures Gol IG Gold REITS Gold 2565 MSCIEAFE MSCI EM Commodities MSCI EM 2505 21.45 32 63 Gold 31 Global HY MSCI EM 1923 Gold 895 obalHY MSCI EAFE 193 US Treures om S&P 500 MSCI ENFE 1205 REITS 85% Global IG 149 REITS 335 MSC EAFE 20 73 Gold 1785 MSCI ENFE Commodities Cash 2593 16.25 215 MSCI EAFE Commodities Global IG 32 5% 168% 45% MSCIEM balHY 1863 80% US Treasures Commodities S&P 500 118 2205 Gaba Y GlobalHY GlobalHY MSCI ENFE 30 12.45 1405 Trases 1165 Gold 23 24 MSCIENE Global 11.6% 8.3% REITS 31.7% REITS 159% obalHY SCIENCE 28% 179% RETS 07% Gobal GMSCI EAFE MSCI EM 1125 God 12 62 GIG 3.15 Gold REITS Cash 18 SAP 500 SAP 500 10 REITS 107 SAP 500 15 BN US Treasures 9.15 Global HY SAP 500 255 S&P 500 15 IN SAP 500 21% SAP 500 1605 GIG 015 Gold 0.15 Gold 865 REITS 115 MSCI EM S&P 500 Global IG Gobal Gold 505 GlobalHY Commodities Global IG 23 GlobalHY Global IG Commodities 135 735 36.6% Gold 250% GobalHY 139 Cash 0.15 Global IG 11.15 Cash 0.15 GlobalHY 102 REITS REITS Gold GlobalHY 585 REITS Gold RETS Commodities 9.15 Cash 3.15 Global IG S&P 500 725 55% S&P 500 37.0% Global IG MSCI EAFE 1925 82% MSO EM GebalHY Global HY 23% Global IG 9.35 199 8.35 SAP SCO MSCI EM SAP 500 -119 Gold MSCI EM Global 149% Cash 49 Gold US Treasures 285 MSCI EAFE Commodities Gobal GMSCI EAFE 43.15 1895 60% US Treasures 115 Treasures Treasures 22% 3.3% Commodities 7.6% 5.0% US MSCIENFE Commodities MSCENE Us 1405 -195 15 Trans Treasures 23 obaly 15 US Treasures 3.15 GlobalHY 30N REITS 5023 Cash 02 US Treasures Commodities 13 JS 58 Cash 0.15 Commodities MSCI EAFE MSCI EM MSCIENCE 95 105 US Thes 20 MSC EM MSCI EAFE SAP 500 2123 22.15 Global IG Commodities 215 REITS -100% MSCI EM 53.75 US Treasures Cash 0.15 MSCI EM Commodities 1828 -11 Gold 2733 Commodities Commodities 247 0 08 2000 2004 2005 2006 2007 2009 2010 2012 2013 2014 2015 2016 2017 2001 2002 2003 US Commodities MSO EM Trans 56 61 2011 US Tres MSC EM Commodities 31 SAP 500 2008 US Treasures 14.05 REITS 3205 SAP SOO MSCI EM 34.55 REITS 3755 SAP 500 MSCI EM 790% Gold 292 REITS 23 GHY MSCI EM 14 37 98% US Treasures Gol IG Gold REITS Gold 2565 MSCIEAFE MSCI EM Commodities MSCI EM 2505 21.45 32 63 Gold 31 Global HY MSCI EM 1923 Gold 895 obalHY MSCI EAFE 193 US Treures om S&P 500 MSCI ENFE 1205 REITS 85% Global IG 149 REITS 335 MSC EAFE 20 73 Gold 1785 MSCI ENFE Commodities Cash 2593 16.25 215 MSCI EAFE Commodities Global IG 32 5% 168% 45% MSCIEM balHY 1863 80% US Treasures Commodities S&P 500 118 2205 Gaba Y GlobalHY GlobalHY MSCI ENFE 30 12.45 1405 Trases 1165 Gold 23 24 MSCIENE Global 11.6% 8.3% REITS 31.7% REITS 159% obalHY SCIENCE 28% 179% RETS 07% Gobal GMSCI EAFE MSCI EM 1125 God 12 62 GIG 3.15 Gold REITS Cash 18 SAP 500 SAP 500 10 REITS 107 SAP 500 15 BN US Treasures 9.15 Global HY SAP 500 255 S&P 500 15 IN SAP 500 21% SAP 500 1605 GIG 015 Gold 0.15 Gold 865 REITS 115 MSCI EM S&P 500 Global IG Gobal Gold 505 GlobalHY Commodities Global IG 23 GlobalHY Global IG Commodities 135 735 36.6% Gold 250% GobalHY 139 Cash 0.15 Global IG 11.15 Cash 0.15 GlobalHY 102 REITS REITS Gold GlobalHY 585 REITS Gold RETS Commodities 9.15 Cash 3.15 Global IG S&P 500 725 55% S&P 500 37.0% Global IG MSCI EAFE 1925 82% MSO EM GebalHY Global HY 23% Global IG 9.35 199 8.35 SAP SCO MSCI EM SAP 500 -119 Gold MSCI EM Global 149% Cash 49 Gold US Treasures 285 MSCI EAFE Commodities Gobal GMSCI EAFE 43.15 1895 60% US Treasures 115 Treasures Treasures 22% 3.3% Commodities 7.6% 5.0% US MSCIENFE Commodities MSCENE Us 1405 -195 15 Trans Treasures 23 obaly 15 US Treasures 3.15 GlobalHY 30N REITS 5023 Cash 02 US Treasures Commodities 13 JS 58 Cash 0.15 Commodities MSCI EAFE MSCI EM MSCIENCE 95 105 US Thes 20 MSC EM MSCI EAFE SAP 500 2123 22.15 Global IG Commodities 215 REITS -100% MSCI EM 53.75 US Treasures Cash 0.15 MSCI EM Commodities 1828 -11 Gold 2733 Commodities Commodities 247 0 08