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Realized Risk And Returns In Developed Markets

By Baijnath Ramraika, CFA

In a paper I co-authored with Prashant Trivedi, we constructed all stock market-cap weighted indices for each one of the twenty-three developed markets included in the MSCI Developed Markets Index as of December 31st, 2014. In the paper, we showed each country's all-stock index in U.S. dollars as well as local currency terms and also reported the number of companies that were included in the country's index every year.

Every country's annual local currency returns and the annualized standard deviation of these returns were plotted on a scatter graph. A line of best fit was drawn to check if investors were compensated for the risk they took, i.e., did higher risk as defined by standard deviation of returns correspond with higher returns.

Figure 1 below shows this relationship with returns on y-axis and risk on x-axis. Note that returns for the purposes of this chart have… Read More …