Teresa (guest) meinte am 20. Oct, 02:40:
A Question from a Reader
One of my readers sent the following via email:Some thoughts in response to your "Why Risk Is Uncorrelated with Return": In 1996 John Cassidy published an article "The Decline of Economics" on The New Yorker. Cassidy charged the economics had disappeared into an ivory-tower world of hightly idealized theory packed with unrealistic assumptions. Economics had become a "giant academic game" in which scholars wrote papers for each other, showing off their mathematical brilliance, but demonstrating little interest in the relevance of their theories to the real world. This is still quite true for today's academic studies.
The existence of derivative markets such as options and futures markets are for risks control and management. Hedgers have the needs to offset their financial risks, speculators then take on these risks for potential profits. If risks transfers do not accompany with proportional rewards, the financial derivatives markets wouldn't have existed for decades.
For the sake of mathematical tractability, the scholars have tendency to
squeeze the real world into their theoretical models.
Some scholars might not have noticed that higher risk is the neccesary but not sufficient condition for higher return. There are scenarios with high risks which indeed have low probability for high returns. For instances, during this election season and year-end cycle, those mutual fund managers as usual risk some naive investors' 401K money to beat up stock prices. The temporary short-term gain in their funds will allow the managers to pocket the 20% paper profits. In the meantime,from both the fundamental and technical perspectives, there are high risks for chasing the stocks under the over-bought condition.
The probably few percentage points gain of the market does not justify for the unknown but likely significant downward slide. Apparently, the high risks in this situation definitely do not correlate with any high returns at all.
Of course, this is only my 5c view of the issue, would anxiously longing for
your insights.
HedgeFundGuy antwortete am 20. Oct, 03:24:
Well Teresa, I think this guy has two separate questions/comments. First, academics are somewhat irrelevant to the real world, they get caught up in games of increasing irrelevant and circular cleverness. True, but that has always been the case. It's worse in softer subjects like philosophy. Secondly, I think it's an important point, put quite well, that "risk is a necessary but not sufficient condition for generating high returns." You are guaranteed average returns if you don't take risk, so Buffet, or Jim Cramer, or anyone successful in building a business (or stock portfolio) took risks. But as the empirical literature points out, there simply isn't any clear metric of 'risk' that is correlated with higher returns, so taking risk isn't sufficient to generate higher returns, merely necessary. I think you need hard work, skill, and luck in business, and these attributes are only needed when one takes risk (ie, if you take no risk, you need no skill, no luck, nor any hard work).
Teresa (guest) antwortete am 20. Oct, 04:39:
Thanks
for your speedy reply. I will pass it on.
