Yahoo Finance How Various Asset Classes Compare Using Risk-To-Return Relations
Corporate Bonds: Figuring Out A Fair Price (Part 3 of 5)
As investors are taking on marginally more risk, they should be compensated in the form of a higher return. The spread between the interest on a corporate bond and a Treasury obligation of a similar duration is one way to assess how much investors are being compensated for taking on additional risk.
Market Realist – Risk-to-return relations show that you need to take on more risk in order to achieve higher returns
The graph above shows the average yields over 20 years for different classes within the bond sector, along with the standard deviation—which is a measure of volatility—of their yields over the last 20 years. Volatility is a measure of the dispersion of returns—in other words, the risk involved.
High yield bonds (HYG) that are rated CCC and below by Standard & Poor’s have an average yield of 15% in that period. However, investing in them entails a huge risk, as we also saw in the previous parts of this series. Their yields have a volatility of 6.1%.
High yield bonds rated B and BB have much less risk, with standard deviations of 2.8% and 2.0%, respectively, but they also have lower average yields of 9.4% and 7.6%.
As we get to investment-grade bonds (LQD)(AGG), the risk-to-return metric shows even smaller numbers. Bonds rated AA have an average yield of 4.7%, with a standard deviation of 1.6%.
Finally, ten-year Treasuries (IEF) are the safest, with a paltry 1.3% volatility and an average yield of 4.1%.
How much risk you can withstand should determine which of the above you’d invest in.
The riskiest asset, by far, meanwhile, is equities (SPY)(IVV). Equities, however, give you the best return in the long run, beating inflation.
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