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The average monthly premium of the Market return over the one-month T-bill return is substantial, as are average premiums of value and small stocks over Market. As the return horizon increases, premium distributions become more disperse, but they move to the right (toward higher values) faster than they become more disperse. There is, however, some bad news. Even if future expected premiums match high past averages, high volatility means that for the 3- and 5-year periods commonly used to evaluate asset allocations, the probabilities of negative realized premiums are substantial, and the probabilities are nontrivial for 10- and 20-year periods.

About the Author(s)

Eugene F. Fama

Eugene F. Fama is Robert R. McCormick Distinguished Service Professor of Finance at the University of Chicago Booth School of Business.

Kenneth French
Kenneth R. French

Kenneth R. French is Roth Family Distinguished Professor of Finance at the Tuck School of Business at Dartmouth College, Hanover, New Hampshire.