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© 2008 Morningstar, Inc. All rights reserved. 3/1/2008 LCN200803-2013997 Risk and Volatility.

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Presentation on theme: "© 2008 Morningstar, Inc. All rights reserved. 3/1/2008 LCN200803-2013997 Risk and Volatility."— Presentation transcript:

1 © 2008 Morningstar, Inc. All rights reserved. 3/1/2008 LCN Risk and Volatility

2 Types of Risk © 2008 Morningstar, Inc. All rights reserved. 3/1/2008 Market timing Inflation Risk Credit Industry/company Market Interest rateCall/reinvestment Liquidity Political/economic Currency

3 Stock Diversification Past performance is no guarantee of future results. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/ Risk Company risk Market risk Number of stocks in portfolio

4 Risk Tolerance Spectrum © 2008 Morningstar, Inc. All rights reserved. 3/1/2008 High risk Low risk Small stocks International stocks Large stocks Corporate bonds Government bonds Cash equivalents High return Low return

5 Asset Class Returns Highs and lows: 1926–2007 Past performance is no guarantee of future results. Each bar shows the range of annual total returns for each asset class over the period 1926– This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008 Compound annual return: 12.5% 10.4% 5.5%5.3% 3.7% Small stocks Large stocks Long-term government bonds Intermediate-term government bonds Treasury bills 150% –50–50 – % –58.0% –43.3% –9.2% –5.1% 0.0% 14.7% 29.1% 40.4% 54.0%

6 Reduction of Risk Over Time 1926–2007 Past performance is no guarantee of future results. Each bar shows the range of compound annual returns for each asset class over the period 1926–2007. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008 Small stocksLarge stocksGovernment bondsTreasury bills –60 – % 1-year Holding period 5-year20-year1-year5-year20-year1-year5-year20-year1-year5-year20-year Compound annual return: 12.5% 10.4% 5.5% 3.7%

7 Risk Versus Return Stocks, bonds, and bills 1926–2007 Past performance is no guarantee of future results. Risk and return are measured by standard deviation and compound annual return, respectively. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/ % Return % Risk Small stocks Large stocks Treasury bills Long-term government bonds Intermediate-term government bonds

8 Ibbotson ® SBBI ® Summary statistics 1926–2007 Past performance is no guarantee of future results. *The 1933 small company stock total return was 142.9%. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008 Compound annual return Arithmetic annual return Risk (standard deviation) Large stocks Small stocks* Government bonds Treasury bills Inflation 10.4% 12.5% 5.5% 3.7% 3.0% 12.3% 17.1% 5.8% 3.8% 3.1% 20.0% 32.6% 9.2% 3.1% 4.2% –

9 Stock and Bond Volatility Varies 1926–2007 Past performance is no guarantee of future results. Monthly returns in percent from 1926–2007. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/ % –10–10 –30–30 –20–20 StocksBonds

10 Risk Changes Over Time Five-year rolling periods 1926–2007 Past performance is no guarantee of future results. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/ % Standard deviation Dec 1930 Jan Small stocks Large stocks Long-term government bonds Treasury bills

11 Inflation Risk: Stocks Versus Fixed Income Range of average inflation-adjusted returns over 20-year periods 1926–2007 Past performance is no guarantee of future results. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/ % 4.0% 13.3% 0.8% 8.6% –3.1% –3.0% 2.9% Treasury bills Government bonds Large stocks Small stocks 20% Return –5–5 0

12 Fixed Income Maturity Risk 1970–2007 Past performance is no guarantee of future results. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/ % –5–5 –10–10 Long-term government bond Intermediate-term government bond Short-term government bond 1.6% 5.9% 9.2% –7.7% –3.8% –1.3% Average rise in price during declining interest rate periods Average decline in price during rising interest rate periods

13 Liquidity Risk Average daily stock trading volume as of December 2007 Past performance is no guarantee of future results. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/ $5 mil Large-cap stocksMid-cap stocksSmall-cap stocks

14 Market-Timing Risk The effects of missing the best month of annual returns Past performance is no guarantee of future results. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008 –40 –30 –20 – % Return Annual return Annual return minus best month


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