Advanced Automatic Investor

[ls7550]

Hi Mark

There's an article I wrote some time ago that explains AIM allocation (both at a micro-level and macro-level). You can read it here --> http://www.automaticinvestor.com/articles/mpt.html

Within that article

In the United States, between 1926 and 1994, small cap stocks have returned 12% annually with a standard deviation (i.e. risk) of 35%. Large cap stocks have returned 10% annually with a standard deviation of 20% over the same period.

Looks to me as though you've used total returns (capital + dividends) over those periods. I've compared the figures you used with that of the Dow (effectively a large cap play) for the period between 1928 to 2008 period which shows just 6% annual average (standard deviation of 20%). I suspect therefore that the 10% you mention arises out of including dividends.

We can approximate the compound average (real actual returns) using Gummy's calculator near the bottom of http://www.gummy-stuff.org/AM-vs-GM.htm

For the 12% mean, 35% stdev case = 6.4% compound average
For the 10% mean, 20% stdev case = 8.2% compound average

Gummy's web page content and calculator are a good tool for demonstrating (and evaluating) such risk/reward type situations that you might like to add to your own web page/article.

http://www.gummy-stuff.org/CAGR.htm might also be of use

Best. Clive.