Abstract
The paper focuses on the impact of time horizon on risk and return, which usually is the object of discussions about “stock versus bond”. The aim of this paper is to investigate the transformation of risk and return when increasing the investment term, and to determine the impact of the investment horizon on investment results when investing in shares and bonds in Lithuania. The authors are proposing a hypothesis that a long-term investment in shares is not only more profitable, but also less risky than investment in bonds.
 Research of developed markets indicated that long-term investments in shares were more attractive than in bonds: the risk of shares fell to the risk of bonds, but at the same time, the return of shares remained high. However, there are just a few surveys in this field involving developing markets.
 Empirical results of this research are based on OMXV index and 10-year government bond data from Lithuania. Our results are different from the research results carried out by authors in developed countries and show that even with an increase in the investment horizon up to 60 months, the risk of shares in Lithuania still remains higher than the risk of bonds, and return of shares is lower than that of bonds. Risk premium for shares is negative during all the periods exceeding 12 months. The results suggest that investors with long-run investment horizons must consider the impact of horizon as well as the development of securities market they invest in.
Highlights
The aim of each investor is the maximization of expected returns on investment and the simultaneous minimization of investment risk
Even with the extension of the investment term up to 60 months, the risk of shares in Lithuania still remains higher than the risk of bonds, and expected return of shares is lower than that of bonds
The examination of research done by other authors in developed countries revealed that if the investment horizon is lengthened, the risk of shares and bonds is significantly reduced
Summary
The aim of each investor is the maximization of expected returns on investment and the simultaneous minimization of investment risk. Risk is an integral part of the investment and since it cannot be eliminated, it is necessary to manage it. The return on low-risk investment (e.g. fixed-term deposits) is very low and sometimes even below inflation, which means that the real return is negative. The investment in shares is deemed to be riskier, the expected return should be higher as well. The risk assessment provides the probability of the potential loss and helps to answer the question what class of investment to choose. The relationship between return and risk is one of the main issues in financial markets
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