Pii: S1062-9769(99)00056-3

If returns are stationary, then the risk of an asset in any time frequency can be estimated from the risk of the asset in any other time frequency through a simple linear rescaling. This implies that short-term risk carries reliable information about long-term risk, and both data frequencies and investment horizons are irrelevant when evaluating an asset’s risk. However, most series of stock returns are nonstationary, which if ignored may lead investors to make significant mistakes. Using recent data from fourteen European securities markets, I show that investors that mistakenly assume stationarity are bound to underestimate the total and systematic risk (and overestimate the risk-adjusted returns) of European stocks. The underestimation of total risk ranges between .25% and 2.18% a month, and averages almost 1% a month. © 2000 Bureau of Economic and Business Research, University of Illinois. All rights reserved. JEL Classifications: G15