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 ).

The Goals and Risk-based Asset Pricing Model (GRAPM)

By

DR. ARUN MURALIDHAR

Incorporating Multiple Stochastic Goals and Agency (especially the importance of skillful agents) to establish consistent and effective Asset Pricing, Asset Allocation and Risk-Adjusted Performance Measures

Paper 1. 2000. Risk-Adjusted Performance with Liabilities and Agents (the M-cube and Skill Measures and not the Sharpe Ratio or M-squared). Financial Analysts Journal 2000. https://www.tandfonline.com/doi/abs/10.2469/faj.v56.n5.2391

Paper 2. 2001. Optimal Risk-Adjusted Portfolios with Multiple Managers (as most investors hire multiple managers, not 1). Journal of Portfolio Management 2001. https://www.pm-research.com/content/iijpormgmt/27/3/97

Paper 3. 2012. LDI – Does it Make CAPM a CRAPM. Op-Ed in CIO Magazine. https://www.ai-cio.com/news/ldi-does-it-make-the-capm-a-crapm/

Paper 4. 2013. The Relative Asset Pricing Model – Incorporating Liabilities and Delegation to Chief Investment Officers: Version 0.1. Journal of Investment Consulting. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2708858

Paper 5. 2014. The Relative Asset Pricing Model: Implications for Asset Allocation, Rebalancing, and Asset Pricing. Journal of Financial Perspectives. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2399845

Paper 6. 2014. The Relative Asset Pricing Model – Towards a Unifying Theory of Asset Pricing. Journal of Investment Consulting. https://www.researchgate.net/profile/Arun-Muralidhar/publication/264788321_The_Relative_Asset_Pricing_Model_Toward_a_Unified_Theory_of_Asset_Pricing_IMCA_R_investment_management_consultants_association_R_Investment_Consulting/links/53f0b0650cf2711e0c430f35/The-Relative-Asset-Pricing-Model-Toward-a-Unified-Theory-of-Asset-Pricing-IMCA-R-investment-management-consultants-association-R-Investment-Consulting.pdf

Paper 7. 2014. Modern Prospect Theory. The Missing Link between Modern Portfolio Theory and Prospect Theory. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2492603

Paper 8. 2015. New Bond would Offer a Better Way to DC Plans. Pensions and Investments, Op-Ed https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2703890

Paper 9. 2016. The Most Basic Missing Instrument in Financial Markets: The Case for Bonds for Financial Security. Journal of Investment Consulting. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2880002

Paper 10. 2016. GBI = Gimme Better (Financial) Instruments: An Innovation to Greatly Simplify Complex Investment Approaches. Investments and Wealth Monitor. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2758927

Paper 11. 2016. (with Prof. R. C. Merton). Time for Retirement SeLFIES. Investments and Pensions Europe. https://www.ipe.com/ipe-at-20-time-for-retirement-selfies/10018263.article

Paper 12. 2017. A Very Simple Goals- and Risk-Based Asset Pricing Model (or Asset Pricing with Heterogeneous Investors). Journal of Investment Management. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3051726

Paper 13. 2018. Can (Financial) Ignorance Be Bliss? Financial Analysts Journal. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3051726

Paper 14. 2019. Managing Longevity Risk – The Case for Longevity-Indexed Variable Expiration (LIVE) Bonds. Retirement Management Journal. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3522653

Paper 15. 2019. The F-Utility of Wealth. It’s All Relative. Journal of Investment Management. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3329917

Paper 16. 2021. Asset Pricing, Asset Allocation and Risk-Adjusted Performance with Multiple Goals and Agency: The Goals and Risk-based Asset Pricing Model. Journal of Investment Management. https://joim.com/wp-content/uploads/emember/downloads/p0666.pdf

Paper 17. 2023. Goals and Risk-Based Asset Pricing for Investors with Multiple Goals and Agents. Journal of Investment Management. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4422455

Paper 18. 2024. Is Finance Theory Partially Responsible for the Retirement Crisis? Markets Group Op-Ed. https://www.marketsgroup.org/news/Op-ed-finance-theory-Arun-Muralidhar

Paper 19. 2024. Goals-based Arrow-Debreu Securities. https://papers.ssrn.com/abstract=4579066

Paper 20. 2024. Is Finance Theory Partially Responsible for the Retirement Crisis? Markets Group. https://www.marketsgroup.org/news/Op-ed-finance-theory-Arun-Muralidhar

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