In Pursuit of the Perfect Portfolio: Myron S. Scholes

00:56:47
https://www.youtube.com/watch?v=D5mDcrwxmgY

Resumo

TLDRIn the discussion on the 'perfect portfolio,' Professor Myron Scholes emphasizes that while the perfect portfolio may not exist, it should prioritize absolute returns, compound growth, and effective risk management. He critiques conventional investment strategies that focus on benchmarks and relative performance, arguing that these often neglect the significance of absolute wealth accumulation. Scholes advocates for a focus on time diversification and the adaptability of portfolios in response to market volatility. He also discusses the valuable insights that derivatives can provide for understanding market risks, emphasizing the importance of a dynamic investment approach tailored to individual risk appetites.

Conclusões

  • 📈 Focus on absolute returns, not just relative performance.
  • 🔍 Compound returns are crucial for wealth growth.
  • ⚖️ Risk management can be effectively achieved using derivatives.
  • ⏳ Time diversification can enhance portfolio performance.
  • 🚫 Beware of the limitations of traditional asset allocations.
  • 🔄 Portfolio strategies should be dynamic and adaptable.
  • 💡 Derivatives provide insights into market risks.
  • 📝 Target date funds may not adequately address risk changes.
  • 💥 Convexity cost impacts compound returns.
  • 👥 Investors should be proactive in managing their investments.

Linha do tempo

  • 00:00:00 - 00:05:00

    Steve Foerster introduces the project "In Pursuit of the Perfect Portfolio" and welcomes Professor Myron Scholes, known for the Black-Scholes option pricing model. He queries Scholes on the concept of the perfect portfolio.

  • 00:05:00 - 00:10:00

    Myron Scholes explains that the perfect portfolio doesn't exist in absolute terms but focuses on terminal wealth, compound return, and managing drawdown. He criticizes the finance industry for emphasizing relative returns over absolute returns, suggesting that investors should focus on compound growth rather than how they perform relative to benchmarks.

  • 00:10:00 - 00:15:00

    Scholes further disputes the value of average returns, presenting the analogy of the Titanic to show that focusing on relative benchmarks can lead to disastrous outcomes. He stresses the crucial nature of understanding returns in real time and addresses the flawed nature of relying on average returns.

  • 00:15:00 - 00:20:00

    He elaborates on the importance of focusing on compound returns, asserting that investments must account for real-time fluctuations. Scholes critiques the common assumptions in finance about normal distributions and constant volatility, advocating for a focus on time diversification in portfolio management.

  • 00:20:00 - 00:25:00

    Scholes introduces the concept of time diversification, suggesting that investment strategies should consider varying levels of risk over time instead of sticking to rigid allocations. He discusses how ignoring this aspect can result in significant losses in terms of compound returns.

  • 00:25:00 - 00:30:00

    Discussing the Black-Scholes model, Scholes describes its foundation in replicating portfolios and its utility in handling varying risks over time. He emphasizes the model’s initial assumptions of constant interest rates and volatility, admitting limitations but noting its foundational role in understanding option pricing.

  • 00:30:00 - 00:35:00

    He addresses concerns regarding derivatives, reflecting on Warren Buffett's characterization of them as "weapons of mass destruction." Scholes explains that while derivatives can leverage risk, they also contribute significantly to risk management when used correctly by professionals.

  • 00:35:00 - 00:40:00

    Scholes notes that despite negative perceptions, the derivatives market is essential for finance, helping to create flexibility and individualized investment strategies. He suggests that concerns about derivatives stem from a misunderstanding and historical context rather than inherent flaws.

  • 00:40:00 - 00:45:00

    He highlights that the option market provides critical information about risks and returns, arguing that it enables a deeper understanding of future risks and portfolio management. The reliance on options can help mitigate significant losses through informed risk management.

  • 00:45:00 - 00:50:00

    The conversation shifts to portfolio structure, with Scholes advocating for customized strategies focused on drawdown and tail risks rather than traditional allocations like a 60/40 strategy, which he considers inadequate for dynamic risk environments.

  • 00:50:00 - 00:56:47

    Finally, Scholes emphasizes the significance of managing convexity costs in investment portfolios. He critiques target date funds for their static approach to risk and suggests that a more dynamic, risk-managed portfolio structure would better serve investors. The discussion concludes with Scholes encouraging more adaptive investment strategies and a shift from benchmark performance to proactive risk management.

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Vídeo de perguntas e respostas

  • What is the perfect portfolio according to Myron Scholes?

    The perfect portfolio focuses on absolute returns, compound returns, and risk management, rather than relative performance to benchmarks.

  • Why are absolute returns more important than relative returns?

    Absolute returns directly affect investors' terminal wealth, while relative returns may ignore significant market risks.

  • What role do derivatives play in investment management?

    Derivatives can help manage risk and provide valuable insights into market pricing and tail risks.

  • How can investors manage risk more effectively?

    By focusing on time diversification and adjusting their portfolios based on market conditions rather than sticking to fixed asset allocations.

  • What are the shortcomings of a traditional 60/40 portfolio strategy?

    It does not account for changing risks or provide a dynamic approach to managing investments over time.

  • How should investors approach target date funds?

    Investors should view these funds critically, as they often rely on static assumptions that may not accurately reflect current risks.

  • What is convexity cost in investments?

    Convexity cost refers to the losses incurred due to volatility, affecting compound returns and the overall growth of the portfolio.

  • What advice does Scholes give to typical investors?

    Investors should seek dynamic, risk-adjusted portfolio strategies, focusing on absolute performance and adapting to market changes.

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  • 00:00:07
    [Steve Foerster] Hello, I'm Steve Foerster.  Welcome to our project "In Pursuit of the Perfect
  • 00:00:13
    Portfolio. Today I have the pleasure and honor  of speaking with Professor Myron Scholes famous
  • 00:00:22
    for the Black-Scholes option pricing model.  Welcome Myron. [Myron Scholes] Thank you.
  • 00:00:27
    [Steve Foerster] Our project is is focusing on  an elusive concept perhaps the perfect portfolio
  • 00:00:35
    and and we'd love to hear your insights in terms  of what is the perfect portfolio mean to you.
  • 00:00:40
    [Myron Scholes] Well obviously that perfect  portfolio does not necessarily exist but the
  • 00:00:53
    idea of the way I think about the perfect  portfolio is to really think about what
  • 00:01:00
    investors are interested in. Investors are  interested in my view on terminal wealth,
  • 00:01:07
    they're interested in compound return, and they're  interested in drawdown so they would like to for
  • 00:01:14
    a level of drawdown have the best experience they  possibly can. Now the problem with a lot of what
  • 00:01:21
    we have done in finance over the last number  of years is forgotten about compound return,
  • 00:01:28
    we forgot about growth in our portfolio and  we forgot about drawdown. What we have done
  • 00:01:35
    is talked about relative return we've talked about  relative how we are doing relative to a benchmark
  • 00:01:41
    so we doing better than the standard Poor 500 are  we doing better than a 60/40 strategy in terms of
  • 00:01:49
    compounding return and getting terminal wealth  enhanced through our activities. The interesting
  • 00:01:57
    point about average returns, or Sharpe ratios, or  information ratios which look at the difference
  • 00:02:06
    between what we're doing and the benchmark  portfolio is really ignoring the most important
  • 00:02:14
    part of investment and that's the absolute return.  And the interesting part about investing that is
  • 00:02:22
    being ignored so moving to what I think the ideal  portfolio should be which is concentrating on
  • 00:02:29
    absolute return and not relative return is that  relative return ignores the benchmark itself
  • 00:02:36
    ignores the risk of the benchmark itself. So the  analogy I like to give is that who's someone on
  • 00:02:44
    the deck of the Titanic and the music is playing  and everyone is very happy to be on the deck of
  • 00:02:51
    the Titanic because those in the lower deck are  dying first and basically when you have the idea
  • 00:02:57
    of benchmarks or average returns you're ignoring  really the most important part of investing which
  • 00:03:04
    is compound return the average return is a  flawed measure it might be able to evaluate
  • 00:03:10
    whether a manager is outperforming on average  but it doesn't talk about the ideal portfolio
  • 00:03:18
    and investing. In other words the problem is when  someone is thinking about crossing a river you
  • 00:03:27
    don't tell the person if they can't swim then  on average this river is only a half a foot deep
  • 00:03:34
    because the individual is very interested where  they're crossing the river now. Right, that's the
  • 00:03:40
    most important thing and you're gonna ask them  more questions how deep is it where I'm crossing
  • 00:03:44
    or and because you only have one run of time you  don't have an ability to have average you can't
  • 00:03:51
    and it returns are not averages. When we start off  an investment we start with $100 today if that
  • 00:03:59
    hundred dollars falls by 50% today or tomorrow  and the investment and then triples thereafter
  • 00:04:07
    it'll go from 100 to then it'll go to two half  so 50 and then triples to go to 150. Or if you
  • 00:04:17
    invest today and it goes to triples first goes  to 300 and then goes to 150 by having at that
  • 00:04:24
    time it will still be 150. So the interesting thing  about investment is not a horizon of five years or
  • 00:04:32
    ten years but the fundamental question is that  what happens each period of time? So the ideal
  • 00:04:40
    portfolio must not assume that I have a 10 year  horizon it must assume what happens each period
  • 00:04:48
    of time in the compounding process because  compound returns multiply they don't average.
  • 00:04:54
    This when you start off with a hundred you go  to 120 you're now investing 100 you initially
  • 00:05:00
    invest it and the 20 additional dollars if you  then lose 20 on top again 20 percent you lose 20
  • 00:05:08
    percent of your original hundred and 20 percent  the 20 that you left invested that ends up at
  • 00:05:14
    96. And similarly, if you go to 80 to start with  you're investing only 80 and it makes 20% it
  • 00:05:22
    goes back to 96 because why you didn't invest  an additional 20 when you talk about average
  • 00:05:27
    return we're assuming always investing 100 and  in in the strategy so the interesting part about
  • 00:05:35
    compound returns if we refocus our attention  on compound returns and what affects compound
  • 00:05:41
    returns that's the key another key of this problem  of the ideal portfolio is we've assumed normal
  • 00:05:49
    distributions we've assumed constant volatility  and constant mean of a portfolio and that and we
  • 00:05:58
    know that's impossible you can't have an S&P 500  portfolio and assume that the returns are constant
  • 00:06:08
    the interesting part about investing is  if cross-sectional diversification is
  • 00:06:15
    free that's claimed by academics and others  diversify cross-sectionally if that's free
  • 00:06:21
    then it has to be the time diversification is  also free in the sense that and you can prove
  • 00:06:28
    mathematically this is the case that if you  have a target level of risk for a given levels
  • 00:06:34
    of return okay then basically if you allow your  risk to fluctuate around the target then it's
  • 00:06:42
    the case that you've taken excess volatility  or idiosyncratic volatility over time and I'd
  • 00:06:48
    like to refocus our attention away from the  cross section which is everyone concentrates
  • 00:06:54
    on and think about time diversification or the  effects of time on portfolio performance to do
  • 00:07:02
    that we have to ask the question what's the most  important thing in terms of time when you only
  • 00:07:10
    have one run of time you only can cross to cross  the river many many times on average okay you're
  • 00:07:15
    fine but if you cross the river at the 20 foot  part of the river and you can't swim you draft
  • 00:07:21
    you don't get back again one leg to live one life  to live and so in return space the most important
  • 00:07:28
    thing in returns is the tails of the distribution  of returns the idea that you could lose a lot of
  • 00:07:33
    money or you can miss an opportunity to make a lot  of money in your performance of your portfolio and
  • 00:07:39
    how that compounds over time and so I think the  distribution returns are changing all the time if
  • 00:07:48
    you have an index fund such as the S&P 500 there's  no way the risk of the S&P 500 can be constant
  • 00:07:55
    over time the composition is changing sometimes  technology has a larger weight sometimes utility
  • 00:08:02
    companies have a larger weight so the volatility  or risk has to be changing of that index that's
  • 00:08:07
    number one number two is the fact that at times  the correlation structure among the assets
  • 00:08:15
    within the index changes sometimes there's a more  idiosyncratic list sometimes most of the risk is
  • 00:08:21
    done by all the assets moving together either down  as they did in 2007-2008 or up as they've done in
  • 00:08:30
    2012 or so you know when the market went up a  lot and so the core the diversification is not
  • 00:08:38
    there times when the correlation structure changes  and so thinking about the assumption of constant
  • 00:08:44
    correlation thinking about the assumptions of  having constant means and constant returns are
  • 00:08:51
    fine from a theoretical point of view but it's  a one period model it's not a multi period model
  • 00:09:02
    you are always associated with the the well-known  black-scholes option pricing model you've had lots
  • 00:09:08
    of questions about it perhaps you can talk a  little bit about how it came to be and also
  • 00:09:14
    if you could comment on there are a wide range  of views of not only options but derivatives in
  • 00:09:23
    general some argue that they're weapons of mass  destruction and and perhaps you could talk about
  • 00:09:29
    those two themes okay Steve first of all you  know there's two aspects of the option pricing
  • 00:09:37
    technology and model one is the technology itself  and the other is the model and the technology was
  • 00:09:49
    at Fischer black and I and Bob Merton developed  was really trying to think about how to create a
  • 00:09:58
    replicating portfolio that's by a combination if  we have a stock a combination of stock and bonds
  • 00:10:06
    that would replicate the returns on the option now  the technology allowed us to have every period of
  • 00:10:16
    time a changing risk or changing volatility and  the changing interest rate and to be able them
  • 00:10:26
    to think about how that hedging portfolio could  be established each period of time and how it
  • 00:10:34
    would evolve over time now what we developed was  a differential equation which described how the
  • 00:10:43
    option changed with regard to changes in the time  and and and the interest rate and volatility and
  • 00:10:53
    you know the expected return fell away because we  had a hedging portfolio or replicating portfolio
  • 00:11:01
    so I didn't care about what the expected return  was for the underlying security for that period
  • 00:11:07
    of time and the interesting but we did care about  this volatility we did care about that and we did
  • 00:11:15
    care a lot about the interest rate and time and  so that problem was that Fisher and I initially
  • 00:11:25
    and took a very long time to try to think about  how to solve this general case so what we did
  • 00:11:33
    was we assumed you know that the interest rate  was constant and we assumed that the volatility
  • 00:11:38
    Wisconsin we got a nice ball even though we  knew that was false right we got our model which
  • 00:11:44
    gotta start somewhere I guess well which took  low-hanging fruit we couldn't do it a general
  • 00:11:48
    case without you know numerically trying to do  that we had to do that in a in a way that would
  • 00:11:57
    be numerical and if you wouldn't understand it  as well so what we did is we assumed that the
  • 00:12:01
    interest rate was constant and we assumed that the  volatility was constant and then we ended up with
  • 00:12:07
    this call the black Scholes model now Fischer  black and I used you know the tools we have and
  • 00:12:18
    assume that you know that investors could set up  the replicating portfolio over a very short period
  • 00:12:24
    of time allowed time to compress Bob Merton used  his technology which is the ito processes and the
  • 00:12:34
    like and ended up with a differential equation  Fischer black and I and Bob Merton you know had
  • 00:12:43
    lots of discussions about what was the correct  approach or what we approach was more susceptible
  • 00:12:49
    to really evaluate the options but and basically  it was more of a theoretical distinction but we
  • 00:12:59
    always liked the our approach better than Bob  Merton this approach but we obviously respected
  • 00:13:07
    his approach and it thought it was really  a terrific approach as well so I think that
  • 00:13:12
    the derivation of our the black Scholes technology  and model allowed one to you options and initially
  • 00:13:25
    we have had a lot of empirical validation over  the years as to the import of the option prices
  • 00:13:34
    that we have seen has giving us information about  risks as I said earlier in the marketplace I think
  • 00:13:43
    that the whole development or use of derivative  technology allowed for us to change the whole
  • 00:13:53
    nature of finance what it has allowed us to do  is go from the big okay to more individualized
  • 00:14:02
    more it isn't kradic more things that a particular  entity a corporation needs or an individual needs
  • 00:14:10
    and away from when I started the profession  and Fisher black and Bob Merton were in the
  • 00:14:16
    profession as these things were big and what  finance does and what we've had in terms of
  • 00:14:24
    financial innovation is the ability to actually  compress time make things faster do things more
  • 00:14:32
    than individuals want and to is to make them more  individualized right and three is to make things
  • 00:14:44
    flexible flexibility is optionality or the idea  to be flexible all three of these things I talked
  • 00:14:51
    about speed of doing things individualization and  flexibility all involve options they've had huge
  • 00:14:59
    valuation and derivatives have huge implications  for our society and ability to innovate and create
  • 00:15:07
    more things that entities and individuals want  in terms of how they manage risks or how they
  • 00:15:16
    actually transfer risks and also how they build  new instruments and securities so it's not as
  • 00:15:24
    if derivatives replace other instruments it's  not as if derivatives could be a complement
  • 00:15:32
    to or a substitute to various other of how the  economy operates but fundamentally they help you
  • 00:15:40
    do things more quickly to help you do things more  individualized and they help with flexibility and
  • 00:15:45
    how one manages their portfolios and how would  you respond to to claims that they're that they
  • 00:15:59
    could be used as weapons of mass destruction  well the interesting part is that even if I
  • 00:16:06
    remember correctly if it was Warren Buffett who  coined the phrase weapons of mass destruction
  • 00:16:12
    I think what he was referring to was at the  time he acquired general reinsurance there
  • 00:16:20
    were many many long-dated option contracts in the  portfolio twenty years thirty year contracts and
  • 00:16:28
    that when he bought the company he realized  that the liability for was much larger than
  • 00:16:37
    he had thought when he had actually acquired the  company because the payoffs those options were
  • 00:16:44
    or the value of the payoffs and they often were  much larger than he had anticipated I think that
  • 00:16:50
    that's what led him to say these longer-dated  options were weapons of mass destruction but I
  • 00:17:00
    do believe that the statement that options are  weapons of mass destruction has to do with the
  • 00:17:08
    ability to lever options or use leverage in  options and we also have myriad other ways
  • 00:17:16
    to use options or derivatives for leverage or  other things other ways in the economy but they
  • 00:17:28
    do have that levered component now you know again  it's sort of survival of the fittest one of the
  • 00:17:35
    interesting things about a derivative or an option  there's one buyer and one seller you know I mean
  • 00:17:42
    it's a zero-sum game in that sense and it's not  and so if I have a buyer and the buyer overpay
  • 00:17:51
    for the option a seller is willing to come in  and write that option and basically you know
  • 00:17:59
    protect the person in the pricing sense against  against a mispricing or tremendous risk pricing
  • 00:18:07
    and I think that's forgotten a lot about this when  market prices fall and derivatives fall and value
  • 00:18:14
    then other instruments also fall in value that  I think that the fundamental question is are the
  • 00:18:23
    prices the best or accurate in the sense of the  best estimate and as the market really get out
  • 00:18:30
    of hand and I think no that's not been true you  don't see that over time the market pricing of
  • 00:18:37
    options conveys much more information than does  the spot markets you had that in 87 crash you
  • 00:18:43
    know the futures market had much better pricing  than the smog Marya the spot market wasn't even
  • 00:18:48
    trading it was completely asynchronous well the  option markets on the portfolio's were giving
  • 00:18:53
    much richer information to what was happening  in the marketplace it's true that some people
  • 00:18:59
    will lose money some people will make money in  options if they misuse them just the same way
  • 00:19:05
    as people who put all their money into a valiant  drug stock or whatever and it collapses in value
  • 00:19:12
    lose money as well I think that the reason  options or derivatives have had a misnomer
  • 00:19:20
    or Mis named is simply because they're the newest  ones on the block you know the same way as if we
  • 00:19:27
    had had electric cars or self-driving cars to  start with you know given the technology that
  • 00:19:33
    is being developed and will be developed and  we wouldn't allow humans to drive but the only
  • 00:19:38
    reason why humans are driving cars and causing  the self-driving cars to have difficulty because
  • 00:19:42
    humans don't drive as well as the self-driving  cars can drive at the current moment so I I
  • 00:19:49
    think that you know that there's it's always when  people want to find something to blame they tend
  • 00:19:57
    to blame those things that are new and so there's  a tyranny of this at its core there's a tyranny
  • 00:20:02
    of the herd what exists first but if you look at  the extent of which derivatives are still involved
  • 00:20:09
    in me and have even grown dramatically since the  2007 2008 crisis then wanted to be amazed to say
  • 00:20:18
    if these are such awful things why are they still  being used so dramatically it's you know Stiglitz
  • 00:20:24
    Stiegler once said that you know survivorship  is a very good method of determining value and
  • 00:20:30
    they survive and they flourish and they grow now  it's true that certain things in the crisis of
  • 00:20:36
    those 7:08 came to the fore namely that AIG had  this price contracts because that but that was
  • 00:20:45
    an internal control problem with in AIG it wasn't  something and it's not the derivative themselves
  • 00:20:52
    you know people want to write derivatives even if  they're a fairly priced if you write derivatives
  • 00:20:58
    to the extent you can lose all your money by doing  it fine but you're making you're making a little
  • 00:21:04
    bit you know one of the interesting things about  writing these options even on Triple A structures
  • 00:21:09
    is that you're gonna make a little money a lot  of the time but occasionally you take a big loss
  • 00:21:14
    there's nothing guarantee that you're gonna do  that if you don't so it's the risk management
  • 00:21:19
    issue within the firm a governance issue that  counts more so than using these instruments
  • 00:21:30
    and so the way I think about the market the market  gives us tremendous amounts of information about
  • 00:21:38
    how risks are changing in the market and one  of the interesting parts about risk changing
  • 00:21:44
    in the market is that the option market among  other markets but the option market tells us a
  • 00:21:51
    tremendous amount about the distribution of future  returns the distribution of future returns when
  • 00:21:57
    we look at a stock the information in the stock  price is rich it has but it has two components
  • 00:22:04
    to it it has changes in risk and expectations  of changes in risk it also has expectation of
  • 00:22:12
    growth or cash flows if it has two things you  have one number it's hard to separate the mean
  • 00:22:18
    effect from the uncertainty effects while the  option mark and the beauty of the black-scholes
  • 00:22:24
    technology and Merton follow-on is essentially  it decomposes it and tells you what the risk
  • 00:22:31
    is okay because we have proved that you can value  an option based on the idea of assuming that it's
  • 00:22:41
    the risk-free rates the appreciation rate so we  have a huge market and telling us what tail risks
  • 00:22:47
    are which are the most important and it tells you  about the entire distribution of possible returns
  • 00:22:53
    now the mark why is the market options market so  valuable to give us information about risk simply
  • 00:23:02
    because it's the tails of the distribution that  are so hard to measure yet those in the option
  • 00:23:09
    market who are valuing how the money put options  or other than money call options are giving us
  • 00:23:15
    tremendous amounts of insight as to risk as  to the future risk that the market the risk
  • 00:23:21
    that we see now you say well this the option  market is not that far sighted it's only has
  • 00:23:27
    three-month options or six-month options or your  option doesn't have a 5-year option but a 5-year
  • 00:23:33
    option is not important if you go back to compound  return what's the most important thing is what's
  • 00:23:39
    gonna happen in the next three months that's what  can happen five years from now and that's where
  • 00:23:43
    the option market has a huge rip richness a huge  richness as far as telling us information about
  • 00:23:49
    how the distribution of returns is changing and  so using these information to construct the ideal
  • 00:23:56
    portfolio one can change the composition of the  portfolio based on risk and how risk is changing
  • 00:24:05
    if one keep the risk of their portfolio cause  then you reduce a huge amount of the convexity
  • 00:24:11
    costs that occur because you allow your portfolio  to fluctuate and risk why is that the case let me
  • 00:24:24
    give you an illustration let's say I call it  time diversification but if you think about
  • 00:24:30
    a portfolio let's say you have a 50/50 strategy  you want to have 50% of your money in bonds 50%
  • 00:24:40
    of your money in stock let's assume incorrectly  that the risk of stocks is the same and the risk
  • 00:24:46
    of bonds is zero okay okay now 50/50 strategy if  you have a 50/50 strategy let's say you always
  • 00:24:56
    keep your risk 50% stock and 50% bond let's have  an alternative strategy the alternate strategy I
  • 00:25:04
    call that's called the bangbang strategy half the  time you're fully invested in stocks the half the
  • 00:25:10
    time you're fully invested in bonds okay now if  you have no skill that's allowing your strategy
  • 00:25:17
    than bagging the risk to change dramatic you have  no skill your expected return is exactly the same
  • 00:25:22
    in the bangbang strategy as it is in the 50-50  strategy using the analogy of beta you know if
  • 00:25:30
    half the time you have a beta one and half the  time you have a beta 0 then basically you're
  • 00:25:34
    gonna have an expected return of one half the bait  of that one half the market return if you have no
  • 00:25:40
    skills so your expected return doesn't change but  your what about your volatility of your portfolio
  • 00:25:45
    your volatility in the bangbang strategy will be  about 0.7 one of the volatility of market because
  • 00:25:53
    you 100% of the 50% time you're 100% invested in  stop while the portfolio of the 50/50 strategy
  • 00:26:00
    always having a vaild of 0.5 or 1/2 the risk okay  it will give you 1/2 the volatility of the market
  • 00:26:06
    so time diversification is volatility management  because it affects your convexity cost and if you
  • 00:26:13
    reduce your convexity cost that's free that is  free diversification but we have ignored in time
  • 00:26:21
    diversification in the way we think about  investment and I think the ideal portfolio
  • 00:26:26
    has to involve a lot of discussion about time  diversification and thinking about how to obtain
  • 00:26:32
    information about how risks are changing adjusting  the portfolio take account of time diversification
  • 00:26:44
    interesting and not enough in finance and  investment management we see broadly most
  • 00:26:51
    investment management have said I want to be  measured relative to a benchmark I want to be
  • 00:26:56
    measured relatively I don't want to be measured  absolutely I want to be measured relatively
  • 00:27:01
    and the reason is because they give up the  responsibility of asset allocation to whom
  • 00:27:09
    this investor or to the institutional man the  institution or to the pension fund or whomever
  • 00:27:17
    else it is they give up that ability they want to  be compensated and how well they do relative to
  • 00:27:23
    the benchmark or not absolutely so the responsibility  of Investment Management is not theirs they're
  • 00:27:28
    only a component or a provider of service to  the portfolio and they ignore changes and risk
  • 00:27:35
    they ignore the asset allocation problem so the  asset allocation problem is the most important
  • 00:27:40
    and I don't care about diversification I don't  care about cross section over it I think that's
  • 00:27:45
    a smaller component of how your wealth is gonna  cumulate over time so if I can just jump in here
  • 00:27:50
    so if I'm an investor I care about my terminal  wealth or my wealth at retirement and you don't
  • 00:27:58
    care about volatility you care about drawdown  okay I care about the downside and then the
  • 00:28:03
    drawdown you talked about getting information from  derivatives that will give me some information
  • 00:28:10
    should I be should I be using derivatives as an  investor as part of this perfect portfolio to
  • 00:28:17
    help manage the risk for example yeah I mean if I  were if I was doing and I certainly would do that
  • 00:28:22
    I mean if you're holding risk in your portfolio  they want to have the lowest cost source changing
  • 00:28:30
    your risk composition or managing your reason  and the very liquid instruments that exist in
  • 00:28:36
    the data management debate your risk management  is is really the least expensive way through the
  • 00:28:43
    derivative market whether it's the futures  markets or whether it's the options market
  • 00:28:47
    ways in which you can adjust your portfolio to  manage this risk now I'm not saying necessarily
  • 00:28:53
    the individual could do that but professional  management certainly can do that and do it in
  • 00:28:59
    a very efficient way so rely on a professional  manager once they understand what what my concerns
  • 00:29:06
    are in terms of drawdown then then we can use  these the interesting the interesting thing is
  • 00:29:10
    the optimal structure of investment has a lot  of agrees of freedom to it mm-hmm one is that
  • 00:29:18
    we have in my view drawdown is important and  why is drawdown important because if you can
  • 00:29:25
    reduce the drop down then and basically one  could achieve a higher terminal value for
  • 00:29:33
    their portfolio and it's really the tales that  have the best the most important effect so what
  • 00:29:38
    might my portfolio look like so I'm concerned  about the tail risk what what might my portfolio
  • 00:29:44
    look like to help me achieve my goals well the  interesting thing is every investor has to ask
  • 00:29:52
    in a global sense what the asset constraints  are you know am i limiting myself to invest in
  • 00:29:59
    a more limited set of assets that's the first  question and the second car and then once one
  • 00:30:06
    has that constraint of some form or other than  the portfolio can be formed optimally to manage
  • 00:30:14
    the risk over time and to optimize the portfolio  over time using either either active portfolios
  • 00:30:25
    or combination of active portfolios and passive  investments and then that optimal portfolio then
  • 00:30:33
    the investor would have to determine the level  of risk they want to run a portfolio to be run at
  • 00:30:45
    so let's talk active versus passive and maybe  we could go back in and talk about some of your
  • 00:30:51
    earlier contributions in terms of passive  investing what what what role did you play
  • 00:30:57
    early on in your career in terms of what now  is a multi trillion dollar industry right in
  • 00:31:06
    nineteen 1968 when I was leaving the universe  Chicago as a newly minted PhD and on my way to
  • 00:31:15
    MIT as an assistant professor at the Sloan School  of Management I spent three weeks or so in San
  • 00:31:25
    Francisco evaluating the investment management  process of Wells Fargo Bank under Wells Fargo
  • 00:31:31
    back was the investment management area was run  by Bill Burton and then John McLeod Mack McLeod
  • 00:31:40
    was running the management science group so I  actually looked at what the management science
  • 00:31:46
    group was doing in terms of asset management and  I wrote a report afterwards saying that they had
  • 00:31:54
    little skills in the inputs to their in their  management their management process and they
  • 00:32:04
    had a few clients I recommended that instead  of concentrating on active management that they
  • 00:32:11
    should concentrate on passive management and six  months later John McCone called me up and said he
  • 00:32:18
    would like to and be engaged in research on this  idea of passive management because no one had
  • 00:32:24
    ever talked about passive management before and I  want to distinguish between passive management and
  • 00:32:31
    index fund management index fund management says  no tracking error to an index I never thought that
  • 00:32:38
    you'd want exactly tracking index because of the  cost of maintaining a no tracking error portfolio
  • 00:32:45
    so what did passive mean to use and passive man  to me was just thinking about at the time replica
  • 00:32:52
    or been close to replicating and index but as  the index composition changed we trade off the
  • 00:32:58
    basis cost associated with having not a perfectly  correlated structure with the transaction cost of
  • 00:33:05
    having to make the adjustment instantaneous layer  to make the adjustments more slowly over time and
  • 00:33:11
    so I'm on Macleod Macklin column phoned me up  and said I'd like to see research on this idea
  • 00:33:19
    I said that I had being an assistant professor at  MIT and responsible for my teaching and research
  • 00:33:27
    that I had this fellow Fischer black who was  a consultant in the Boston area we had several
  • 00:33:36
    conversations together and he was thinking of  setting up his own firm maybe he could be the
  • 00:33:41
    one who travels back and forth between Boston and  San Francisco and I would be with him there and
  • 00:33:50
    I did describe to McLeod that Fischer and I had  been doing research with Mike Jensen on testing
  • 00:33:57
    the capital asset pricing model and that and so we  started an association wells fargo wanted to have
  • 00:34:05
    a lot of research done and seeing what we can do  passively not actively picking stocks but passive
  • 00:34:12
    investment management and it led to several papers  that I wrote at the time not being an academic was
  • 00:34:21
    a lot of fun because there's a lot of research  empirically and at the same time there are the
  • 00:34:26
    practical implications of what we were doing  and developing a portfolio at that time so in
  • 00:34:38
    you you are a rare animal in in the academic world  having made major contributions both on the theory
  • 00:34:46
    side and the empiric side can you talk about  the the marriage of the two and the importance
  • 00:34:52
    of that because it often is is overlooked in our  profession well I I think that interesting enough
  • 00:34:58
    I think that one of the things all of science is  trying to do when all of business is trying to
  • 00:35:03
    do is to see how we can have theory on the one  hand and experience on the other hand and bring
  • 00:35:10
    experience and Theory closer and closer together  because we always think you need Theory first okay
  • 00:35:15
    then you got experience second and my view has  always been in Fisher black and other people's
  • 00:35:22
    views have always been that they're really rich  together because if you can have great empirical
  • 00:35:28
    testing or experience okay that helps your  theory and vice versa without theory experiences
  • 00:35:34
    meaningless and without experience theory is  meaningless right because I had everything in
  • 00:35:40
    science is inductive I don't care what we say we  don't go from first principles because you have to
  • 00:35:46
    data mining things your inductive and hafta with  if your inductive you have to be very careful
  • 00:35:50
    that you don't gather the wrong data and do the  wrong things without some theoretical underpinning
  • 00:35:57
    whether it's an economics or other sciences you  can come completely nonsensical results and you
  • 00:36:02
    can add and so I think that at the time when I  was starting off it would became obvious to me
  • 00:36:10
    that we would have to combine empirical work with  theory and I enjoyed both of those and think it's
  • 00:36:17
    very important to our science very important and  a lot of ways to do the empirical work that I
  • 00:36:23
    did there was no data you know we had to develop  the data and and I worked very hard to make sure
  • 00:36:29
    that we did develop the data and and then as we  develop the data we made that data there to the
  • 00:36:37
    community at large and the community at large was  then able to do empirical reserve which then fed
  • 00:36:42
    back on a theory the theory became richer and  the two of them together were hand and glove
  • 00:36:47
    and you know and some things were rejected some  new things were born puzzles came about and into
  • 00:36:53
    the profession and as a result of that it builds  a much richer science and I think the interesting
  • 00:36:59
    thing is what we're trying to do and in academics  is shorten the time shorten the time from theory
  • 00:37:07
    to experience and those drug trial drug trials  would that be sort of the analogy do you think
  • 00:37:13
    well yeah I mean even in in a lot of what we do  is there's research and development I always think
  • 00:37:21
    research and development arm is named because it's  not really research and developments research and
  • 00:37:26
    testing its development and testing and they all  feedback with each other so if you go into drug
  • 00:37:31
    analogies you're doing the trial it's testing  testing everything is not R&D R&D is the wrong
  • 00:37:38
    name it's not research and developments research  and testing it's development and testing and then
  • 00:37:42
    back and forth and that creates a richness now  if true yeah I think very careful when you're
  • 00:37:48
    doing that that you don't end up in the situation  where you have a dead end because you you've data
  • 00:37:54
    mined you know and you've garnered from the past  information which then tells you that the future
  • 00:38:00
    but one of the nice things we have in finance and  academics and and financial economics is we have
  • 00:38:09
    theory and we have a richness of theory we have  empirical testing of the theory and then mapping
  • 00:38:15
    back into the theory and also a willingness to  throw out you know what we think is not working
  • 00:38:22
    and add to things we think is working and look a  lot of the innovation inventions and innovations
  • 00:38:28
    that I've seen over in my myriad years in that  profession came from a theoretical side you know
  • 00:38:34
    and then they were developed and applied you know  passive investment is this said is is what's been
  • 00:38:41
    applied generally that's about 40 or so percent  of the market now is managed passively when when
  • 00:38:47
    I started and brought to Wells Fargo we talked  to institutions about it you know people looked
  • 00:38:52
    at us like we're crazy how can you manage  your portfolio believing in market pricing
  • 00:38:57
    see the interesting thing is that why would  market pricing work market the ideal portfolio
  • 00:39:09
    we have to use market prices we have to use option  prices the information in these option prices is
  • 00:39:15
    information you can either believe the market  gives you information or you can say the market
  • 00:39:20
    gives you no information if the market gives you  information you use that that's the way I started
  • 00:39:25
    off I say the market has information you know the  market let's use the information in my faith many
  • 00:39:31
    people don't believe the market has information  you look at the government Federal Reserve policy
  • 00:39:35
    or other people they say Oh market doesn't have  any information we gotta use that and anything we
  • 00:39:40
    do that's crazy yeah to me it's cuz why not get  people are putting their money on the table you
  • 00:39:46
    know I mean even I think we've had these prices of  I don't know if it's legal in Canada I know it's
  • 00:39:51
    somewhat now illegal in the United States but  you can have these markets you say who's gonna
  • 00:39:57
    win the election you know they have election  mark it's right people say how can a market
  • 00:40:02
    know anything about elections this comes up once  every every four years or so you know and they're
  • 00:40:06
    having these elections the market is amazing how  accurate is relative abundance they get polls do
  • 00:40:12
    you know they do all this stuff you go to a pocket  tells you what the odds are to me that's a huge
  • 00:40:16
    amount of information and that's we thought it  we have to use this information the prices give
  • 00:40:21
    us information and we can form portfolios we can  know what's going on so if the ideal portfolio
  • 00:40:26
    doesn't use information in the market to do it  it's not an ideal portfolio and so you need to
  • 00:40:31
    look at the prices and how the market is telling  us information so derivative markets are telling
  • 00:40:36
    us information the spot markets are telling  us information the forward markets in other
  • 00:40:42
    ways they're telling us huge amounts information  and I think it's better to use the consensus or
  • 00:40:49
    the wisdom of crowds you know millions of people  making decisions and that that's we're trying to
  • 00:40:55
    do like we're trying to think of now the whole  world is saying the government in releases a
  • 00:41:00
    report every court you know there's also the null  cast I mean everyday you're getting now Google is
  • 00:41:06
    doing searches and knowing how many people are  buying this or asking questions about that you
  • 00:41:10
    know so it's we're trying to figure out how to  price how to get information and use those prices
  • 00:41:15
    so what happens when you mentioned 2008-2009 the  so called financial crisis where 2007-2008 doesn't
  • 00:41:23
    send 2008 where where we had some major changes  in terms of equity prices going down from from an
  • 00:41:31
    individual investor perspective what do you think  were some of the lessons that they should have
  • 00:41:39
    taken away from that and and how did derivatives  play into the whole you know I mean I remember
  • 00:41:45
    that Federal Reserve or other bankers saying it  was a bolt out of the blue nothing was there if
  • 00:41:52
    you looked at the option market though the put  options were for forecasting crisis ahead they
  • 00:42:00
    change in the distributional shape you saw at a  financial the financial firms the tail risks the
  • 00:42:07
    put option prices were increasing dramatically as  you went into those seven it was like a tsunami
  • 00:42:14
    was coming in a market new to tsunami was coming  the Fed Reserve I don't carry they want to they
  • 00:42:19
    want to look at the data fine they don't want to  look at the information in prices fine they can
  • 00:42:22
    ignore that but the market would wasn't stupid  you know market was already pricing this in you
  • 00:42:28
    got oh is spreads were increasing the options  implied accreditor the idea of the LIBOR spreads
  • 00:42:34
    were increasing you know they Ted spreads were  increasing I mean credit spreads were increasing
  • 00:42:39
    I mean it wasn't as if this is all of a sudden  you know my god this is our affair so yes there's
  • 00:42:46
    tremendous information in prices and the options  market or a derivative markets give you this
  • 00:42:51
    information you don't have to use it but when  the reinsurance premiums go up you know if you
  • 00:42:57
    have reinsurance premiums that go up and does that  mean that risk of insurance is going up certainly
  • 00:43:04
    it is you know so if risk is going up then you  could use that information or not you know and
  • 00:43:10
    so the market was had tremendous and information  in fact if you looked at it the market all the
  • 00:43:18
    sectors of the S&P 500 that's 10 sectors they  were in the S&P column had elevated tail risks
  • 00:43:26
    where I'm being elevated and a nice part about  it is even though crises if you look historically
  • 00:43:32
    don't happen that frequently you know millions  of people are betting on crisis and the elections
  • 00:43:38
    every day and millions of people are betting on  or you know changing their views and protecting
  • 00:43:44
    themselves you know it's Darwinian survival of  the fittest if you're gonna be out there writing
  • 00:43:48
    options and the tales of distribution and you're  gonna be wiped out pretty soon in a leopard market
  • 00:43:55
    unless you have some skills we've talked about  many of your contributions to the profession
  • 00:44:05
    in terms of in terms of obviously the option  pricing model and early tests of the capital
  • 00:44:13
    asset pricing model you also did a lot of work in  in the area of taxes how important is that from
  • 00:44:19
    an investor's perspective and and what are some  of the insights that you could provide in that
  • 00:44:24
    area do we do we overlook the impact of taxes  migrators thing to me should if I were to find
  • 00:44:32
    assigning a tax policy when I talk about risk  management is trying to keep your risk of your
  • 00:44:38
    portfolio constant or at your target and then not  allow it to fluctuate around that I wish it were
  • 00:44:45
    the case that we would allow investors to adjust  the risk to their portfolio as opposed to being
  • 00:44:51
    locked in through a tax policy that currently  penalized is you if you adjust your portfolio
  • 00:44:58
    only for the sake of trying to manage its risk  now the interesting part about tax management
  • 00:45:05
    are the things I've written on in taxes it's tax  minimization is not the correct model what the
  • 00:45:11
    tax is it always the fact is that you have there  is a cost to paying taxes but there's a cost not
  • 00:45:18
    to paying taxes as well so if you there's that  the implicit return or the loss return that you
  • 00:45:24
    would have by not in your portfolio and obviously  that if you had a time sequence in the Optima or
  • 00:45:33
    ideal portfolio then why do you want to do is you  here managing your risk okay it's much easier to
  • 00:45:40
    tax manage your portfolio if you're trying to just  change beta and control for downside risk than it
  • 00:45:48
    is if you have a view of a particular security  if you have a view of a particular security or
  • 00:45:54
    locked into that asset and therefore the tax  costs might be higher because you really love
  • 00:46:02
    that you know on you and you can't manage your  taxes efficiently but I've always felt that it's
  • 00:46:08
    possible that if you're talking about beta risk  or managing the risk of your optimal portfolio
  • 00:46:15
    that it's much easier to manage your taxes  within that confined that it is if you have
  • 00:46:21
    a situation where you have a particular asset  you love or a particular asset you don't love
  • 00:46:32
    so it maybe if we could come full circle to to  the the perfect portfolio so some of the themes
  • 00:46:39
    you've talked about I should be concerned with  absolute returns as opposed to relative returns
  • 00:46:45
    because I if I only consider relative returns  I'm doing less worse than others perhaps in
  • 00:46:52
    a down market I should be listening to the  derivatives market which has some important
  • 00:46:58
    information what about what my portfolio might  look like for a typical investor I don't think
  • 00:47:06
    that necessarily a buy-and-hold portfolio or an  ass allocation such as a 60/40 allocation is the
  • 00:47:14
    optimal allocation because the risk of a say  an index fund is changing all the time and so
  • 00:47:25
    I think the investor has to take account of that  in deciding on compound return as I said earlier
  • 00:47:31
    a 60/40 strategy is an interesting strategy which  is a common strategy you 60% in stocks 40% in bond
  • 00:47:40
    I don't exactly know where that came from by the  way I sort of maybe historically someone said oh
  • 00:47:46
    this gives me approximately the volatility that  I want you know on average but average volatility
  • 00:47:52
    is not as important as volatility each period if  you have average volatility 60/40 on average you
  • 00:48:01
    could have that volatility but if you can  manage the interim volatility and keep it
  • 00:48:06
    constant it's much better a 60/40 strategy or  an asset allocation strategy just determined
  • 00:48:12
    by market weights does not take account of risk  at all nor does it take a kind of a return okay
  • 00:48:19
    and so I was saying even if you assume that the  returns are constant we know that compound return
  • 00:48:29
    is affected by the volatility and by the skewness  of the distribution you know that is we've known
  • 00:48:37
    that from option pricing technology and option  pricing theory but somehow it doesn't come in
  • 00:48:43
    to any discussion about how to run a portfolio  the option theory taught us a lot about how to
  • 00:48:50
    run a portfolio but somehow has never got into the  literature or people have talked about compound
  • 00:48:56
    return never talked about time diversification  as I've described here so the idea portfolio
  • 00:49:01
    has to start talking about time because we only  have one run of time and time is very important
  • 00:49:09
    and I want us to refocus on thinking about time  and how you run your portfolio depends on how
  • 00:49:16
    your risk is and how you want to manage your  risk over time I think there's three ways of
  • 00:49:23
    making money in the markets and if it's the  case that I'll just concentrate on time the
  • 00:49:32
    reciprocation but if as I said cross-sectional  diversification is not putting here all your eggs
  • 00:49:39
    in one basket is a good model not assuming that  risk is constant of your portfolio or a 60-40
  • 00:49:48
    strategy or whatever strategy you have will be  optimal each period of time it's also something
  • 00:49:54
    that is free if you want to readjust to reduce  the convexity cost or the compound return drag
  • 00:50:01
    that you have by taking excess volatility for  the average investor can you explain what you
  • 00:50:06
    mean by convexity risk well convexity risk is  the idea that basically if you had a situation
  • 00:50:16
    let me give you the illustration if you have a  choice and let's say your portfolio would have
  • 00:50:25
    fluctuation plus 20 minus 20 that if on average  is 0 that plus 20 minus 20 is not a very good
  • 00:50:36
    result because if you make 20 percent you know and  then lose 20 percent you're down at 96 for a $100
  • 00:50:43
    investment if it goes to 80 only recover back to  96 so the convexity cost is 4 percent in this case
  • 00:50:50
    and we know that the greater than volatility  if you have a greater volatility portfolio
  • 00:50:56
    you're gonna have that convexity cost because the  greater the volatility the more you have the loss
  • 00:51:02
    return because the volatility effect just that  bounces back and forth that volatility hurt you
  • 00:51:07
    in terms of compound return on the on the other  hand if you have a strategy which has a target
  • 00:51:16
    level of volatility and you allow your volatility  to bounce around that target level of volatility
  • 00:51:22
    that's wasted convexity costs in other words it's  it has if you really have a target volatility of
  • 00:51:28
    twenty five ten right and you allow it to be minus  twenty thirty thirty zero or some so on average it
  • 00:51:37
    could be ten we've been awaiting that reduces  the compound return of your portfolio because
  • 00:51:43
    you've taken excess volatility the more xs/small  to you take the more you have lost compound return
  • 00:51:50
    and so if you don't ever manage the risk of  your portfolio to keep it at your target you
  • 00:51:56
    have excess volatility that excess volatility  has a huge cost let me give an illustration I
  • 00:52:02
    mean let's say you had a KO loss okay you you  you took a large loss in your portfolio this is
  • 00:52:10
    not a normal distribution it's just to realize  loss it takes a long time to recover yeah so
  • 00:52:15
    that's a huge convexity only go to one lunch  in one run atomic right you got it you take
  • 00:52:20
    that huge loss it takes a long time to recover  or if you sit around you know and you miss the
  • 00:52:25
    big gain it takes a long time to recover you know  so that it's the fundamental difference is that
  • 00:52:31
    we have to think about those convexity costs  and what they're doing to the compound return
  • 00:52:42
    what do you think of products that are that are  out there that claim to the so-called target date
  • 00:52:48
    funds that that claim to take into account that  the years I have until a retirement for example
  • 00:52:54
    and therefore reallocating my equity bond split  I'm a very old man at this time and they tell me
  • 00:53:02
    that I should be involved now maybe in 1980  if I was a young man at that time and I did
  • 00:53:10
    invest in bonds you know there's an asymmetry of  the fact that the bond returns could be very big
  • 00:53:17
    as well and nowadays it tends to me that there  could be a lot of pay losses in bonds so the
  • 00:53:23
    risk of bonds today might be far different from  the risk of bonds and 90 getting given a current
  • 00:53:28
    low interest rate environment correct so the ideas  why I I think that this is a stupid thing because
  • 00:53:35
    what it's saying is that well you really want  to do is say as you get older maybe your risk
  • 00:53:41
    appetite Falls because your human capital Falls  but the ideal portfolio should take out of risk
  • 00:53:49
    not bonds versus stock and the target date funds  would say when you're young you should invest in
  • 00:53:55
    stock when you're old you should invest in bonds  it's not the correct model the correct model is
  • 00:54:00
    risk when you're young what risk do you want to  take and what is the risk as a function of your
  • 00:54:05
    realized return you know what is the risk you  want to take as to what has to do with the other
  • 00:54:10
    parts of your of your human capital other parts  of your wealth structure and so the target date
  • 00:54:16
    funds which are sort of stylized ways in which  a thinking of numerical asset allocation are not
  • 00:54:23
    taking account of what we should be accounting for  what's the risk and how is the risk changing and
  • 00:54:28
    what is the dynamics of risk you know nothing to  do with forecasting weather returns are gonna be
  • 00:54:34
    great or not just efficient risk management and  a new target date front of the future will be
  • 00:54:39
    a risk managed fund not a target date fund not a  fun and not one is saying I have a ten year rise
  • 00:54:46
    in her three or as I've heard so many people say  I have a 20 year horizon therefore I should run
  • 00:54:52
    my portfolio differently from one year horizon  or a six-month horizon that's not true we need
  • 00:54:58
    a new way of looking at we have a new we have all  the ways we have all the ways today are available
  • 00:55:04
    we're just not focusing correctly we're not  focusing on what we should be why because this
  • 00:55:09
    relative value performance has taken over everyone  says the bet you know the benchmark is king if the
  • 00:55:15
    benchmark is king and we just looked at relative  performance when I developed her involved that was
  • 00:55:20
    Mike Jensen and others who develop performance  measurement it was just to say how can we say
  • 00:55:26
    this manager is uh performing the benchmark  that doesn't mean he says-- uh performing
  • 00:55:30
    the benchmark or not outperforming the benchmark  you should forget about the benchmark it's stupid
  • 00:55:41
    what advice would you have for for typical  investors I would like to see those who
  • 00:55:49
    have skills or managers you know start dividing  defining the portfolio that I'm describing and
  • 00:55:56
    offer that to investors is a way to think about  this is then the investors can choose different
  • 00:56:05
    levels of risk different levels of drawdown  they can have and different stock demux then
  • 00:56:12
    have that as the way to run a portfolio not  ignoring this entirely something that's more
  • 00:56:19
    dynamic has to be dynamic changing that's the  be dynamic thank you well myron on behalf of
  • 00:56:25
    investors everywhere i want to thank you for  taking the time to share your thoughts with us
  • 00:56:44
    you
Etiquetas
  • portfolio
  • Myron Scholes
  • investment
  • absolute returns
  • risk management
  • derivatives
  • time diversification
  • compound returns
  • benchmarks
  • convexity cost