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Episode 260: Prof. James Choi: Practical Finance

The Rational Reminder Podcast

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The Effect of Stock Market Mean Reverse on Asset Allocation

For popular authors, there's this really strong sense that stocks become less risky as the investment horizon increases. If you look at the annualized standard deviation of the S&P 500 in the post-war period and you just change the holding period from one year to three years to five years to ten years, the annualed standard deviation is pretty flat. So this notion that the stock market mean reverse is just not there very strongly in the data at all. But it turns out those two forces exactly offset each other.

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