Presentation Abstracts
Markowitz Wealth Management to Pension Plans: Augmenting the Funded Ratio with New Metrics
Sanjiv Das, Santa Clara University
The talk will survey how work with Harry Markowitz, i.e., adaptations of the mean-variance paradigm for mental accounting in wealth management leads eventually to new metrics for pension plans. The primary metric for the health of a liability based plan (LBP) is the ratio of the LBP’s current assets to its present-valued liabilities. This “funded ratio” misses important financial factors, so we suggest three additional metrics of financial health, connected to the probability of fulfilling the plan’s liabilities. The first two metrics compare the current assets and projected future contributions to those needed to attain either (1) a specified probability for meeting all the liabilities (SAM, the solvency assets multiple) or (2) specified probabilities for meeting each liability (FAM, the funded assets multiple). The third metric, the risk-free funded ratio (RFFR), uses the STRIPS curve to determine the fraction of the liabilities that can be covered without risk. We implement these metrics, first using Monte Carlo simulation given a fixed investment portfolio strategy, and then using dynamic programming to optimize investment portfolio strategies that maximize SAM and FAM.
Have Capital Markets Forgotten about Sustainability?
Robert Engle, Co-Director of the Volatility and Risk Institute at NYU Stern School of Business
Investors who do not want to bear the full risk of climate change, will seek portfolios that hedge these long run risks. I will discuss several such portfolios and show how they can be used to assess the greenness of investment products and the exposure of financial institutions to climate risks.
Today we observe that these hedge portfolios are performing badly. I will introduce the concept of “termination risk.” This is a long run risk that a business will at some time, not too far in the future, no longer be viable. I will argue that this helps understand the behavior of fossil energy firms and the performance of sustainable funds. It has implications for climate mitigation and policy.
Collaborating with Harry Markowitz: A Remembrance
Bruce I. Jacobs, Jacobs Levy Equity Management
Bruce will recount his over 30-year relationship with Harry. They shared similar interests and did complementary work. This led to collaboration, debate, and building upon each other’s ideas and research. Together they worked to bridge the gap between theory and practice.
The Unreasonable Effectiveness of Portfolio Theory in Theory and Practice
Andrew Lo, Massachusetts Institute of Technology
In 1960, the physicist Eugene Wigner published the influential article “The Unreasonable Effectiveness of Mathematics in the Natural Sciences”, but Harry Markowitz was among the first to demonstrate that Wigner’s principle also applies to the social sciences. In this talk, Prof. Lo will provide some personal reflections and several case studies of the unreasonable effectiveness of portfolio theory in unexpected contexts, including the development of drugs to treat rare diseases and the financing of fusion energy.
Design Financial Products Based on What their Users Already Know and Improve Performance
Robert Merton, Massachusetts Institute of Technology