"Riskless debt is 30 day Tbills. Do you mean quality debt (e.g., government debt) of comparable average duration, i.e., an intermediate term investment grade bond fund?"
Yes. Riskless credit wise which is the credit premium between int treasuries and junk.
"Anyhow, if true, does one receive 23% more return with junk (over quality)? That is, is the risk adjusted return of VWEHX in line with both equity and debt? (Where's Ken and a Sharpe's ratio discussion?)"
I would say expected that the return would be 23% more that is based on its equity correlation. The rest of the spread (60%) is other risk premiums; default, liquidity, loss rate, call risk, credit lowering risk and probably some more.
Now before Duane jumps in here and points out that int Treasuries have a similar total return over the life of the fund, the early to mid 80's were times we aren't likely to see repeated.
By the way El, what do you think of this plan?
My twin grand daughters will be 2 in November. Right now in Florida, I can pre-pay a 4 year university plan for $13,000 each or $26,000. If I do that the $26,000 is gone. Gone now and gone in 16 years when they start college
Another option offered by the plan would be to pay for each monthly until they graduate from high school in about 16 years, and that costs about $96 per month each or $196 per month. ($37,000 total payout)
So if I put the $34,000 in the 7% fund and used the income ($198/ month currently) to fund the payments, I would still have to expect to have quite a bit more than $0 left after 16 years, more than the $8000 difference in the initial potential investment.
Am I missing something here? This seems too obvious so I must be.
best,
Bill
