Bonds versus Stocks: Some Lessons from Capital Market Theory

The apparent end of the bear market in bonds and relatively high interest rates have led some investors to conclude that bonds are now the superior investment medium. On the other hand, stocks continue to command a large following. Theoretically, neither should completely dominate the other: some combinations of bonds and stocks should prove superior to either taken alone. In the following sections we will summarize the theoretical argument, then examine some relevant data.