Risk Changes over Time

The riskiness of an asset can change over time. This image shows how the risk of four traditional asset classes changed over five-year rolling periods from 1926 to 2023. Rolling-period returns are a series of overlapping, contiguous periods of returns. In this case, the first rolling period is 1926–30, the second is 1927–31, and so on.

While small stocks and large stocks are more volatile than government bonds and Treasury bills, there are times when assets considered less risky exhibit greater volatility. Notice that government bonds and Treasury bills have generally been more risky since the 1980s than they were in earlier decades. Small stocks, while still the most volatile asset class, were less risky in recent periods than they were in the 1930s.

Measuring risk

Risk is measured by the standard deviation of annual returns. It measures the fluctuation of returns around the arithmetic average return of the investment. The higher the standard deviation, the greater the variability (and thus risk) of the investment returns. Government bonds and Treasury bills are guaranteed by the full faith and credit of the U.S. government as to the timely payment of principal and interest, while stocks are not guaranteed and have been more volatile than the other asset classes. Furthermore, small stocks are more volatile than large stocks, are subject to significant price fluctuations and business risks, and are thinly traded.

About the data

Small stocks are represented by the Ibbotson Small Company Stock Index. Large stocks are represented by the Ibbotson Large Company Stock Index, long-term government bonds by the 20-year U.S. government bond, and Treasury bills by the 30-day U.S. Treasury bill. An investment cannot be made directly in an index.