Risk never gives investors a break. It’s constantly baiting us, dispensing false signals and generally throwing landmines on the path that appears as a smooth trek to easy gains.
Consider that the past 20 years have been particularly fruitful in financial economics for identifying sources of partial predictability in certain data series. A few examples include dividend yield and other fundamental valuation measures that have shown robust results for estimating the equity premiums for medium- to long-term horizons. The shape of the yield curve and the spread between interest rates on corporate and Treasury bonds have also shown encouraging results as predictors.
In fact, there are a number of factors that are worth monitoring on a regular basis for estimating the price of risk in the major asset classes. No surprise, then, that watching dividend yield, the term structure of interest rates and a host of other metrics, and inferring risk premia and asset allocation from the analysis informs much of our work in The Beta Investment Report. The danger is thinking that the investment challenge has been solved.