Asset Allocation reading- risk-free security

[johntavv]

Reading 18 says:
For the multiple and often ongoing time periods of a typical portfolio there is no risk-free asset that meets the required definition of known return with zero standard deviation and correlation. The single-period government security will have a changing return over time and a standard deviation of return.
But from previous readings, isn’t a government security risk free with no standard deviation of returns?

 

[cpk123]

comparison of single period vs. multiple periods.
this is a point being made about multiple periods of time - for that - there would be a change in return year on year - and hence a standard deviation for the return. So it is not constant return, 0 std dev across time periods.

 

[johntavv]

1. When they “a single-period government return will have a changing return over time and standard deviation of return”, they mean that return levels can change each year, is that correct?
2. But this is risk-free in the sense that it will have a secure return (but yes the level of the return is not constant, as per above), is that correct?

 

[cpk123]

johntavv wrote:
1. When they “a single-period government return will have a changing return over time and standard deviation of return”, they mean that return levels can change each year, is that correct?

yes

johntavv wrote:
2. But this is risk-free in the sense that it will have a secure return (but yes the level of the return is not constant, as per above), is that correct?

By definition - risk free means zero std deviation of returns. so it is NOT risk free in a multi period context - but has to be lived with from most pricing models perspective.

 

[johntavv]

Okay i understand that over multiple periods the return can change, so a government security is NOT risk-free in a multi period context.
But to confirm, in a single period context, the standard deviation of return is 0, and so a government security is risk-free?