History Characterizes Risk and Return

The most complete historical database for stocks, bonds and mutual funds can be found at the Center for Research in Security Prices (CRSP) at the University of Chicago’s Booth School of Business. Figure 9-1 shows the annualized rates of return for 24 different indexes as constructed by Index Fund Advisors (IFA). This table provides an interesting review of various indexes over several different time periods. Note the pattern of higher annualized returns of small cap and value stocks over large cap and growth stocks over time. 

Figure 9-1


The time series construction in Figure 9-2 enables index fund investors to make investment decisions based on a statistically substantial and significant 90-year time frame. This time series construction simulates a fund’s composition prior to its inception and allows for estimates of past performance data. The style purity of index fund investing allows for this exercise, providing an abundance of data. This time series construction carefully stitches together 90 years of risk and return data for the indexes referenced in this book, with the black-dotted outlined section representing the simulated indexes and the solid black lines representing live mutual fund data from Dimensional Fund Advisors. While not a perfect representation, the data produced by the time series construction is a very useful tool. Statisticians who consider 30 years of risk and return data to be statistically significant would consider this collection of 90 years of data a feast!


Figure 9-2

Step 9Center for Research in Security PricesCRSPUniversity of ChicagoTime Series ConstructionStyle Purity