Empirical Probability Distributions of Real Return from Swedish Stock and Bond Portfolios

Abstract

This paper introduces a new non-parametric approach to integrate empirical probability functions of the real return for different investment horizons for five portfolios of Swedish stocks and bonds. In our setting the problem reduces to generating new generalizations from a known empirical Markov chain. We find that the stocks yield a real return of about 7.5% and bonds about 3.0%. Our results suggest that an investor ought to avoid bonds in the long run. Finally if the investors goal is to minimize the risk of capital destruction the preferable long-run passive portfolio is a mix of bonds and stocks.

Keywords: Empirical distribution, stock returns, bond returns, markovian bootstrap, MCMC

JEL Classification: C11, C15, G10, G11