I was wondering if folks who ordinarily have some portion of their portfolio allocated to bonds might be better off to instead utilize a mix of stocks and cash. The idea is the stocks and cash would be proportioned so as to achieve the same volatility as bonds while potentially achieving a higher return.
To investigate, I pulled historical data from yahoo! finance going back to the early 1960s for 3-month treasury bills (proxy for cash returns), 10-year treasury notes (proxy for bond returns), and the S&P 500 (proxy for stock returns). Then I solved for the stock/cash proportions (54.7% / 45.3% with monthly rebalancing) that would provide for the same volatility (8.3% annualized standard deviation in returns) provided by the 10-year treasury notes.
What I found is that the stock/cash portfolio provides a slightly lower return than the 10-year treasury notes. Perhaps next week I'll try to get my hands on some corporate bond data and see if the idea pans out better there.
