Consider a 2-year investment
Variance of the 2-year return is double of that of the one-year return and σ is higher by a multiple of the square root of 2
Generalizing to an investment horizon of n years and then annualizing:
The Fly in the ‘Time Diversification’ Ointment
Annualized standard deviation is only appropriate for short-term portfolios
Variance grows linearly with the number of years
Standard deviation grows in proportion to
To compare investments in two different time periods:
-Risk of the total (end of horizon) rate of return
-Accounts for magnitudes and probabilities
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