AQR revisits modern portfolio theory by examining how stocks, bonds, and commodities behaved across rolling five year periods versus a 45 year horizon. The paper argues short term market chaos often distorts perceptions while longer datasets reveal surprisingly stable relationships between risk, volatility, and returns.
Efficient Frontier “Theory” for the Long Run
AQR
Cliff Asness
Research
12 Pages
Key Takeaways
Short Horizon Distortions: Across nine rolling five year periods, stocks underperformed bonds in 3 cases, showing how short horizons can radically distort long term expectations.
Long Run Alignment: The full 45 year sample showed stocks earning just above 5% over cash, while bonds generated roughly 3.5%, aligning more closely with traditional efficient frontier assumptions.
Volatility Misconceptions: During 2005 to 2009, stock volatility stayed near 16% annually despite the Global Financial Crisis, challenging assumptions that major drawdowns always produce extreme long horizon volatility.
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