Benjamin Graham on Cash Reserves

x This rate of return was not exceptional, but its character can be seen from Figure 1 which shows the risk-adjusted rates of return earned by the fund and by the S&P 500. FIGURE 1 Risk-Adjusted Rates of Return; Graham-Newman Corp. and S&P 500 Graham- 30% ,-------------------------------, Newman Corp. x l< o 10 20 alpha '= 7.70 beta .39 r 2 .46 30 40% x S&P 500 The relationship depicted in Figure 1 indicates a beta coefficient of .39 and an alpha coefficient of 7.70. The data are adjusted for the risk-free rate of return as measured by the interest rate on 91-day U.S. Treasury Bills. The performance of Graham-Newman Corporation during these dozen years indicates a very low sensitivity to market risks-with returns more directly related to the maturing of the special situations that Ben kept finding. The risk characteristics illustrated in Figure 1 are summarized as follows: S&P 500 performance Risk-free rate of return S&P 500 Premium for risk Graham-Newman Corp. Expected risk premium Risk-free rate of return Expected return Actual return Excess return 18.3% per year - 1.2 17.1% 6.6% 1.2 7.8% 15.5% --- + 7.7%