CAGR vs Volatility
Motivated by sleeplessness

So I was lying in bed and thinking ...

>Not again!
Pay attention.
I was thinking that many gurus speak of risk and reward (where "risk" is measured by Standard Devation, for reasons unknown to me).
One gets the impression that the higher the Standard Deviation (or Volatility) the higher the expected reward ... or maybe the other way around.

>The other way around? You don't know?
It doesn't matter.
I just thought that there was a common understanding (among those in-the-know) is that there's some relationship between what you'd expect to get in the way of Compound Annual Growth Rate and the Volatility of annual returns. So I got outta bed and decided to ...

>To generate some spreadsheet, right?
Uh ... yes. (Click on the picture to download the spreadsheet.)

It goes like this:

  • You pick four assets from a list of 10, including Large & Small Cap Growth and Value, T-bills, Treasuries etc.
  • You pick your allocations, like (25% of this) + (30% of that) etc.
  • The spreadsheet calculates the CAGR fo every 30-year period starting in 1928 and ending in 1971.
    (I pick these 'cause I happen to have the data, here.)
  • It also calculates the volatility of the annual returns over those 30-year time periods.
  • Then you click a button called SORT (what else?) and the CAGRs are sorted, lowest to highest.
  • Then you get a chart which shows the volatilities plotted against these increasing CAGRs.

So, try as I might, I can't identify any meaningful relationship between CAGR and Volatility.

>Then I suggest you go back to sleep.

P.S. There's some other bumpf on the spreadsheet ...