risk management

The memo is a summary of return, risk, probability of loss and correlation matrix of three main assets, equity, fixed income and real estate. The data is collected from yahoo finance and Federal Reserve website.

The holding period return : (p1-p0)/p0.
The risk is measured by standard deviation.
The CV represents Coefficient of Variation which is calculated by CV/HPR.
The outcome is showed in chart below:

Return/Risk/Efficiency Summary
15-year
Return
Risk
CV
P(Loss)
Equity
4.52%
18.03%
3.99
40.10%
Fixed Incone
5.25%
3.61%
0.69
7.32%
Real Estate
5.24%
10.65%
2.03
31.14%

10-year
Return
Risk
CV
P (Loss)
Equity
6.84%
17.13%
2.51
34.49%
Fixed Income
4.59%
3.15%
0.69
7.25%
Real Estate
1.95%
11.65%
5.97
43.34%

5-year
Return
Risk
CV
P (Loss)
Equity
12.74%
15.14%
1.19
20.01%
Fixed Income
5.03%
3.73%
0.74
8.88%
Real Estate
0.15%
8.42%
55.74
49.28%

Correlation Matrices
15 Year
Equity
Fixed Income
Real Estate
Equity
1.00
-0.36
0.29
Fixed Income
-0.36
1.00
-0.15
Real Estate
0.29
-0.15
1.00

10 Year
Equity
Fixed Income
Real Estate
Equity
1.00
-0.07
0.55
Fixed Income
-0.07
1.00
-0.48
Real Estate
0.55
-0.48
1.00

5 Year
Equity
Fixed Income
Real Estate
Equity
1.00
-0.28
0.55
Fixed Income
-0.28
1.00
-0.73
Real Estate
0.55
-0.73
1.00

In the 15-year period, investing in equity would get the least return while had the highest probability of loss. While in the 5-year, and 10-year analysis, due to the real estate recession, investing in the real estate is the worst choice. Overall, investing in fixed income is both profitable and less risky.

From the correlation matrices, we can get that fixed income has a reverse relationship with equity and real estate. However, the real estate and equity are strongly positively related, especially in 5-year period. So if the equity and real estate