The
Volatility Index (invented by colleague Bob Whaley) which measures the implied risk in options prices (the higher the options price, the bigger implied risk) is down to 18% from a high of 32% in March. This means that the expected change (the standard deviation) in the returns from holding the S&P index for the next year is 19%.
The decline in risk has corresponded to an increase in the price of the S&P 500. The market "prices" the decline in risk by reducing the risk premium necessary to get investors to hold the risky asset. A higher current price means lower expected future return, and thus a lower risk premium for holding stocks.
Or for a longer run view,
The decline in risk has corresponded to an increase in the price of the S&P 500. The market "prices" the decline in risk by reducing the risk premium necessary to get investors to hold the risky asset. A higher current price means lower expected future return, and thus a lower risk premium for holding stocks.
Or for a longer run view,
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