Bridge over ocean
1 September 1996 Financial Analysts Journal Volume 52, Issue 5

On the Risk of Stocks in the Long Run: A Resolution to the Debate?

  1. Mike Dempsey
  2. Robert Hudson
  3. Kevin Littler
  4. Kevin Keasey

In response to the ongoing debate in this journal about whether the risk of investments in the stock market is increased or decreased by lengthening the investment period, we show that Bodie's attempt to identify market risk with the price of “put” options leads to a circular argument within the workings of arbitrage-free option pricing models. Thus, Bodie failed to rebut the conventional view that longer investment horizons may be thought of as less risky. Bodie's put option prices are relevant, however, to determining “market” prices of stock investment insurance.

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