Does the famous idiom “stocks for the long run” have an empirical or a theoretical foundation? Bali et al. (2009) show that the cumulative return distributions of stocks and bonds intersect for all investment horizons, implying that stocks do not dominate bonds, regardless of the horizon. This paper shows that adding the riskless asset to the analysis yields a clear-cut dominance of stocks over bonds: for any combination of bonds with the riskless asset, one can find a combination of stocks with the riskless asset that dominates it. This dominance holds for all non-decreasing preferences as long as the investment horizon is 3 years or longer. However, this strong result does not imply that arbitrage opportunities exist.
Bibliographical noteFunding Information:
We are grateful to Geert Bekaert, the Editor, to the Associate Editor, and to the two anonymous referees for their many constructive comments and suggestions.
© 2021 Elsevier B.V.
- First-degree stochastic dominance (FSD)
- First–degree stochastic dominance with a riskless asset (FSDR)
- Investment horizon
- Stocks versus bonds