Realitivity in Finance

1. REALITY 1 – Goals are stochastic (e.g., pension liabilities) – and not “Background Risk”, “Habit” or “KUJ” or deterministic as in CAPM
2. REALITY 2- Investors have multiple stochastic goals (retirement, kid’s education, post-retirement health) and not just 1.
3. RELATIVITY 1 – Investors maximize goal-relative risk-adjusted returns – and not “Epstein-Zin” utility functions! or additive utility functions.
4. RELATIVITY 2 – They hire agents/ #assetmanagers to manage portfolios (delegation at many levels – a Board to an investment team; the team to asset managers – passive or active)
5. REALITY/RELATIVITY 3 – They want (hopefully) skillful agents – largely ignored in the literature. So can’t use #Sharpe ratios but must use #Mcube.
6. REALITY 4 – They specify risk through an absolute volatility and a target #trackingerror in their #investment Policy Statements – and not some random/arbitrary “risk aversion” parameter.
REALITY 5 – An effective asset pricing model should also provide consistent #assetallocation and risk-adjusted performance measures to be useful – only #capm does this; 99% of other asset pricing models fail this test (e.g., APT ).

Related Research

By

DR. ARUN MURALIDHAR

To be updated

Ambarish, R., and L. Seigel. 1996. Time is the Essence. Risk 9, no. 8 (August): 41–42.

Arrow, K. J., 1953. The role of secutrities in the optimal allocation of risk– bearing. As translated and reprinted in 1964, Review of Financial Studies, (31), 91–96.

Brennan, M. 1993. Agency and Asset Pricing. Working paper, University of California Los Angeles Anderson Graduate School of Management.

Coqueret, G. L. Martellini, and V. Milhas. 2017. Equity Portfolios with Improved Liability Hedging Benefits. Journal of Portfolio Management, Volume 43, Issue #2, pp 37-49.

Cornell, B. 2009. Luck, Skill, and Investment Performance. The Journal of Portfolio Management, Winter 2009, Vol. 35, No. 2: pp. 131-134.

Cornell, B., and R. Roll. 2005. A Delegated Agent Asset-Pricing Model. Financial Analysts Journal, 61, no. 1 (January/February): 57–69.

Das, S., H. Markowitz, J. Scheid, and M. Statman. 2010.  Portfolio Optimization with Mental Accounts. Journal of Financial and Quantitative Analysis, Vol. 45, No. 2 (2010), pp. 311-334.

Das, S., D. Ostrov, A. Radhakrishnan, and D. Srivastav. 2018. A New Approach to Goals-Based Wealth Management,” Journal of Investment Management, Vol. 16, No. 3, (2018), pp. 1–27.

EDHEC. 2010. New Frontiers in Benchmarking and Liability-Driven Investing. An EDHEC-Risk Institute Publication, September 2010

Janssen, R., B. Kramer and G. Boender. 2013. Life Cycle Investing: From Target-Date to Goal-Based Investing. The Journal of Wealth Management, Summer 2013, pp 23-32.

Jorion, P. 2003. Portfolio Optimization with Tracking Error Constraints. Financial Analysts Journal. 59, no. 5 (September/October): 70–82.

Kahneman, D. and A. Tversky. 1979. Prospect Theory: An Analysis of Decision under Risk. Econometrica. Vol. 47, No. 2 (Mar., 1979), pp. 263-292

Kobor, A., and A. Muralidhar. 2018. “How a New Bond Can Improve Retirement Security.” Retirement Management Journal 7 (1): 16–30.

Kóbor, Ádám and A. Muralidhar. 2019. Ensuring Retirement Security with Simple GLIDeS (May 7, 2019). Financial Analysts Journal. 23 June 2020 Volume 76, Issue 3.

Leibowitz, Martin L. 1987. Liability returns: A new look at asset allocation. The Journal of Portfolio Management,  Winter 1987, 13 (2) 11 -18

Merton, R.C. and A. Muralidhar. 2015. Monetary Policy: It Is All Relative. Pensions and Investments, April 16, 2015, Crane Publishing, Chicago, IL.  http://www.pionline.com/article/20150416/ONLINE/150419916/monetary-policy-its-all-relative

Merton, R. C., and A. Muralidhar. 2016. “Time for retirement ‘SeLFIES’?” Investments and Pensions, April 27, https://bit.ly/3angbjB

———. 2017. Selfies Can Improve the Nation’s Retirement Security. Plan Sponsor Magazine, November 20, 2017.

———. 2018a. SeLFIES for India: These Long-Term Bonds Can Fund India’s Infrastructure Needs and Improve Retirement Security. The Times of India (February 5). https://blogs.timesofindia.indiatimes.com/toi-edit-page/selfies-for-india-these-long-term-bonds-can-fund-indias-infrastructure-needs-and-improve-retirement-security/.

Merton, R. C., and A. Muralidhar, 2018b, “SeLFIES a good look for retirement. Top 1000 funds,” June 8, https://bit.ly/3anUmjO

Merton, R. C., and A. Muralidhar, 2018c, “SeLFIES can improve Japan’s retirement security,” Nikkei, June 22, https://bit.ly/2wrz8CW

Merton, R. C., and A. Muralidhar, 2018d, “Emeklilik İçin Basit ve Etkin Bir Çözüm Önerisi: SeLFIES” (a simple and efficient solution for retirement SeLFIES),” BEST Magazine, June, https://bit.ly/3apEHQZ

———2019. “Taking a Closer Look at Selfies: Added Thoughts Clarifications” Pensions and Investments. May 27, 2019. https://www.pionline.com/article/20190527/PRINT/190529910/taking-a-closer-look-at-selfies-added-thoughts-clarifications

Merton, R. C., A. Muralidhar, and A. Herce, 2018, “Bonos para mejorar las pensiones,” El Pais, December 14, https://bit.ly/3aruKCy

Merton, R.C., A. Muralidhar, L. Martellini, 2017, “Pour la création “d’obligations retraite,” Le Monde, April 4, https://bit.ly/38pU6iJ

Merton, R., and A. Muralidhar. 2020a. SeLFIES: A New Pension Bond and Currency for Retirement. Journal of Financial Transformation, April 2020. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3548319

Merton, R.C. and Arun Muralidhar. 2020c. A Six-Component Integrated Approach to Addressing the Retirement Funding Challenge. Journal of Investment Management, Vol. 18, No. 4, 2020. https://joim.com/a-six-component-integrated-approach-to-addressing-the-retirement-funding-challenge/

Merton, R.C., A. Muralidhar, and R. Pinto -Ferreira. 2019. SeLFIES for Portugal: An Innovative Pan European Retirement Solution, in The Future of Pension Plans in the EU Internal Market, ed. Nazare Costa Cabral and Nuno Cunha Rodrigues, SpringerLink, pp 161-178

Merton, R.C., A. Muralidhar, and A. Vitorino. 2020. SeLFIES Pode Audar País Renovar Previdência Complementar, Valor Economico, January 24, 2020.

Merton, R.C., A. Muralidhar, and A. Vitorino. 2020. SeLFIES Can Help Brazil Create a SUPER Supplementary Pension, Revista Brasileira de Previdência, 11ª edição – Primeiro Semestre I-2020. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3579370

Modigliani, F., and L. Modigliani. 1997. Risk-Adjusted Performance. Journal of Portfolio Management, 23, no. 2 (Winter): 45–54.

Muralidhar, A. 2001a. Innovations in Pension Fund Management, Stanford University Press, Palo Alto, CA.

Muralidhar, A. 2011. A Smart Approach to Portfolio Management: An Innovative Paradigm for Managing Risk, Royal Fern Publishing, Great Falls, VA.

Muralidhar, A. 2015b. The Sharpe Ratio Revisited: What It Really Tells Us (March 18, 2015). Journal of Performance Measurement, Vol 19, No. 3, 2015, Available at SSRN: https://ssrn.com/abstract=2692859

Muralidhar, A. 2018. Fifty States of Gray: An Innovative Solution to the Looming DC Retirement Crisis. Investments and Wealth Institute, Denver, CO.

Muralidhar, A., and R. van den Brink. 2023.How goals-based liability indices can help pension funds meet net zero targets. Net Zero Investor, November 21, 2023. https://www.netzeroinvestor.net/news-and-views/how-goals-based-liability-indices-can-help-pension-funds-meet-net-zero-targets

Muralidhar, Arun and van den Brink, Roland and Kramer, Anton. 2024. Can DC Participants Trust the Competence of Dutch Pension Funds? (February 6, 2024). Available at SSRN: https://ssrn.com/abstract= 4718870

Muralidhar, A., and J. W. van Stuijvenberg. 2005. “Devising an Investable Liability Index.” Investments and PensionsEurope (October): 46.

Muralidhar, A. and Vitorino, Alexandre. 2023. How Brazil’s RendA Bond Could Render DC Retirement Risk Obsolete: A Case Study (March 15, 2023). Retirement Management Journal, VOLUME 12 NUMBER 1, 2023, pp 20-31 at SSRN: https://ssrn.com/abstract=4409502 or http://dx.doi.org/10.2139/ssrn.4409502

Perold, A. 2004. The Capital Asset Pricing Model. Journal of Economic Perspectives, Volume 18, Number 3—Summer 2004—Pages 3–24

Pfleiderer, P. 2020. Chameleons: The Misuse of Theoretical Models in Finance and Economics. Economica, Volume 87, Issue 345, January 2020, Pages 81-107

Reisman, H., and B. Lauterbach, 2004, “Keeping up with the Joneses and the home bias,” European Financial Management 10:2, 225–234

Rudolf, M. and W. Ziemba. 2004. Intertemporal Surplus Management. Journal of Economic Dynamics and Control, Volume 28, Issue 5, February 2004, Pages 975-990.

Sharpe, W. 1964. Capital Asset Prices: A Theory of Market Equilibrium under Conditions of Risk. Journal of Finance 19, no. 3 (September): 425–442.

Sharpe, W. F. 1966. “Mutual Fund Performance”. Journal of Business. 39 (S1): 119–138. doi:10.1086/294846

Sharpe, W. 1990. Capital Asset Prices: With and Without Negative Holdings.  Nobel Lecture, December 7, 1990

Sharpe, W. 1994. The Sharpe Ratio. Journal of Portfolio Management 21, no. 1 (fall): 49–58.

Sharpe, W. 2010. Adaptive Asset Allocation Policies, Financial Analysts Journal, May 2010 Vol. 66 Issue 3 Pages 45-59

Sharpe, William F.  and Litterman, Robert. 2014.”Past, Present and Future Financial Thinking,” Financial Analysts Journal, Volume 70, Number 6, November/December 2014, pp. 16-22.

Sharpe, W. and L. Tint. 1990. Liabilities―A New Approach. Journal of Portfolio Management 16, no. 2 (winter): 5–10.

van Binsbergen, J. H.,  M. W. Brandt and R. S. J. Koijen. 2006. Optimal Decentralized Investment Management. NBER Working Paper Series, Working Paper 12144 http://www.nber.org/papers/w12144

Waring, B., and D. Whitney. 2009. An asset–liability version of the Capital Asset Pricing Model with a multi-period two-fund theorem. Journal of Portfolio Management 35:4, 111-130

Design a site like this with WordPress.com
Get started