The Ibbotson-Sinquefield Simulation Made Easy

The Ibbotson-Sinquefield simulation for common stock returns, published in this Journal in 1976, can be considerably simplified. The model predicts that a future stock return will be given by a historical risk premium, randomly drawn, added to an expected T-bill rate implied by the yield curve. Actual random drawings are not really necessary; the model can be cast as a geometric random walk. So most results can be understood via the rapid convergence of the probability distribution for the common stock geometric return to a normal distribution.