Vol. 22, No. 1, 2024 Amitabh Chandra and Sumon Mazumdar Biotech innovations lead to the development of life-saving drugs and vaccines. However, bringing a new drug to market is an expensive,risky, and time-consuming process. According to one survey, the probability that a drug that has completed pre-clinical trials, would successfully pass all three stages of… Read more
Articles
Accelerating the Capital Solution to Climate Change
Vol. 22, No. 1, 2024 Yu (Ben) Meng, Anne Simpson, Anna Snider and Christina Yi The missing “I’s” of information and incentives have restrained the potential of the capital markets in previous decades to respond to the growing demand for climate solutions. Progress on both fronts in recent years, however, is moving us rapidly beyond… Read more
Limiting Investment Opportunity Sets, Asset Pricing, and the Roll Critique
Vol. 22, No. 1, 2024 Bob Korkie and H. J. Turtle We consider the impact of low volatility assets on the investment opportunity set (IOS) and resultant asset pricing. The limiting IOS and its finite investable proxy imply an asset pricing model that differs from standard asset pricing models. The Sharpe (1964)–Lintner (1965) CAPM with… Read more
Realativity in Finance: Goals and Risk-Based Asset Pricing for Investors with Multiple Stochastic Goals and Agents
Vol. 21, No. 4, 2023 Arun Muralidhar This asset pricing model incorporates four positive realities of investing; that investors have many stochastic goals, seek to delegate to skillful agents, explicitly specify risk budgets, and maximize risk-adjusted relative returns. As a result, it also incorporates the relative nature of investing—“Realativity”. Critical to investment practice, it provides… Read more
The Diminishing Role of Active Mutual Funds: Flows and Returns
Vol. 21, No. 4, 2023 James X. Xiong, Thomas M. Idzorek and Roger G. Ibbotson U.S. active equity mutual funds have experienced net outflows since around 2006. The AUM-weighted performance remains similar over time, but equal-weighted performance (which emphasizes small AUM active funds) has deteriorated. Inflows/outflows contribute to the over/underperformance of individual active funds. We… Read more
Reimagining Index Funds
Vol. 21, No. 4, 2023 Rob Arnott, Chris Brightman, Xi Liu and Que Nguyen “Gold-standard” cap-weighted indices have a buy-high and sell-lowdynamic that causes a structural long-term performance drag. Of course,relative to itself, no index can underperform, which is the reason it goes unnoticed. If we use a company’s fundamentals to choose stocks—and then cap-weights… Read more
The Determinants of Inflation
Vol. 21, No. 3, 2023 William Kinlaw, Mark Kritzman, Michael Metcalfe and David Turkington The authors apply a Hidden Markov Model to identify regimes of shifting inflation and then employ an attribution technique based on the Mahalanobis distance to identify the economic variables that dynamically determine the trajectory of inflation. Their analysis enables policymakers to… Read more
Asset Allocation with Non-Pecuniary ESG Preferences: Efficiently Blending Value with Values
Vol. 21, No. 3, 2023 Douglas M. Grim, Giulio Renzi-Ricci and Anna Madamba The explosion of interest in ESG investing has yielded several quantitative frameworks that seek to incorporate non-pecuniary ESG preferences into conventional multi-asset portfolio optimization models. In this article, the authors specify an accessible approach that allows investors to simultaneously optimize for both… Read more
Efficient Goal Probabilities: A New Frontier
Vol. 21, No. 3, 2023 Sanjiv Das, Daniel Ostrov, Anand Radhakrishnan and Deep Srivastav In goals-based wealth management (GBWM), an investor looks to maximize the probabilities of attaining each of n goals over time. Because the goals are in competition for potentially limited financial resources, their relative importance must be specified, which we do by… Read more
Are 60/40 Portfolio Returns Predictable?
Vol. 21, No. 3, 2023 Jamil Baz, Steve Sapra and German Ramirez Long-horizon asset class returns are reasonably predictable using simple models of expected return. However, equity returns over the last decade far exceeded model-based predictions. We posit a framework for the drivers of potential mean-reversion in equity returns. We believe increases in real bond… Read more