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The Risk and Reward of Investing a Lost Earnings Award: A Comparison of Stocks, Bonds, and Bills

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  • Michael L. Nieswiadomy

Abstract

This note analyzes the risk and reward of investing the present value of a 40-year worklife of lost earnings (of $10,000 per year), discounted using rates of returns on various portfolios. Eight portfolios are examined: 100% in Treasury bills; 100% in intermediate-term government bonds; 100% in corporate bonds; four mixtures of the S&P 500, intermediate-term government bonds, and Treasury bills; and 100% in the S&P 500. The rates of return on the portfolios and the growth rate in hourly earnings are randomly selected from a year in the 1965–2010 period. The results of 10,000 Monte Carlo simulations indicate that a 40-year portfolio will face “ruin” roughly 51% to 52% of the time for all portfolios. However, the portfolios differ greatly in the median year of ruin (if ruin occurs), ranging from a high of the 38th year for a 100% Treasury bills portfolio, to the 22nd year for a 100% S&P 500 portfolio. The percent of time that the award greatly enriches (with an ending balance over $1,000,000) the plaintiff varies greatly as well. A 100% S&P 500 portfolio enriches the plaintiff 36.8% of the time; a portfolio of 30% S&P 500, 30% intermediate government bonds, and 40% Treasury bills enriches 14.5% of the time; while a 100% Treasury bills portfolio will virtually never enrich.

Suggested Citation

  • Michael L. Nieswiadomy, 2012. "The Risk and Reward of Investing a Lost Earnings Award: A Comparison of Stocks, Bonds, and Bills," Journal of Forensic Economics, National Association of Forensic Economics, vol. 23(2), pages 199-207, September.
  • Handle: RePEc:fek:papers:doi:10.5085/0898-5510-23.2.199
    DOI: 10.5085/0898-5510-23.2.199
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    JEL classification:

    • K13 - Law and Economics - - Basic Areas of Law - - - Tort Law and Product Liability; Forensic Economics

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