Do Short-Term Measures of Risk and Return Predict Long-Run Wealth?

Ekwensi J

Published on: 2025-12-04

Abstract

I examine two questions: what is the relation between short-term measures of portfolio risk and reward and long-run performance of an equity portfolio; and does this relationship depend on the degree of diversification? My simulation analysis shows that short-term total portfolio risk, short-term diversifiable risk, and the Sharpe ratio often are poor predictors of ending real wealth except for undiversified portfolios. In addition, both measures of short-term risk often are poor predictors of downside risk. These results are robust across portfolio weighting, level of trading costs, rebalancing frequency, and form of the underlying asset pricing model in the simulation.