Question

Fixed income securities are popularly viewed by some as being less risky versus equity securities. Yet actual / historical results (e.g., Ibbotson studies) would seem to contradict this view. Please explain this discrepancy between generalized perceptions and actual results. You may wish to include both quantitative considerations as well as behavioral finance issues.

Answer 1

It is generally believed that fixed income securities are less risky when compared to equity securities. The reason for this is there is more risk involved in equity markets and there is no certainty about the movements in the equity market. However, in case of fixed income securities, the investor has faith that there is not much volatility in the return. Due to this general belief in the minds of the investors they become complacent when they invest in fixed income securities whereas they are cautious about their investment in equity market. The cautiousness leads to proper asset allocation in the equity market. The asset allocation is not done in fixed securities investments. This is one of the major reasons for the discrepancy between generalized perceptions and actual results in case of investment in fixed securities and equity market.