And the winner is: Portfolio C
|Portfolio||Year 1 Return||Year 2 Return||Total 2-Year Return||Winner|
Did you choose correctly? Are you surprised? Whether you got it correctly or not, one has to be impressed that gaining 19% one year and losing only 16% in the following year will result in an overall loss. Repeated for multiple 2-year periods will result in losing all of your investment.
Even though the absolute difference in returns for Portfolio A (+19, -16) is three times that of Portfolio C (+5, -4), the lower volatility inherent in Portfolio C’s returns make it the winner.
Here’s an easy-to-read article that explains why funds with lower volatility outperform.