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 ).

Practical Application of GRAPM

By

DR. ARUN MURALIDHAR

This section highlights practical applications.

New Financial Instruments:

  1. RendA+ – Brazil’s Retirement Income Bond (created January 2023). Vitorino, A and A. Muralidhar. 2024. How Brazil’s RendA+ retirement bond could render DC risks obsolete. Retirement Management Journal, Vol 12, No. 1, 2023. https://publications.investmentsandwealth.org/iwmonitor/library/item/vol__12__no__1__2023/4168936/
  2. Tesouro Direto. 2023a. Cálculo da Rentabilidade dos Títulos Públicos Ofertados no Tesouro Direto – Tesouro RendA+ – NTN-B1. (Calculation of Government Bond Performance at Tesouro Direto – RendA+ – NTNB1) https://www.tesourodireto.com.br/data/files/59/04/6C/7B/9E706810CE0A3068894D49A8/NTN-B1_Rentabilidade.pdf.
  3. ———. 2023b. Balanço do Tesouro Direto. Tesouro Direto. (Direct Treasury Balance Sheet. Treasury Direct). https://sisweb.tesouro.gov.br/apex/fp=2501:9::::9:P9_ID_PUBLICACAO:46244.
  4. Tesouro Nacional. 2023. Tesouro RendA+: Balanço de 30.01 a 01.03.(Tesouro RendA+ Report from January 30 to March 1, 2023). https://sisweb.tesouro.gov.br/apex/f?p=2501:9::::9:P9_ID_PUBLICACAO_ANEXO:19416.
  5. Educa+ – Brazil’s Education Bond (created August 2023). https://bnnbreaking.com/finance-nav/investments/brazils-national-treasury-introduces-tesouro-educa-a-unique-initiative-to-boost-child-education-investment/
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