{"title":"Pension Funds Should Never Rely on Correlation","authors":"R. Lagnado, N. Taleb","doi":"10.3905/jai.2022.1.157","DOIUrl":null,"url":null,"abstract":"The central decision for a pension fund is the allocation between stocks and bonds. For intellectual backup in making this decision, many rely on metrics and methods from Modern Portfolio Theory (MPT). We show how, historically, such an “optimal” portfolio is in effect the least optimal one, as it fails to protect against tail risk and under-allocates to the high-returning asset class. MPT fails in both risk control and real-world investment optimization.","PeriodicalId":45142,"journal":{"name":"Journal of Alternative Investments","volume":null,"pages":null},"PeriodicalIF":0.4000,"publicationDate":"2022-02-04","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":"0","resultStr":null,"platform":"Semanticscholar","paperid":null,"PeriodicalName":"Journal of Alternative Investments","FirstCategoryId":"1085","ListUrlMain":"https://doi.org/10.3905/jai.2022.1.157","RegionNum":0,"RegionCategory":null,"ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":null,"EPubDate":"","PubModel":"","JCR":"Q4","JCRName":"BUSINESS, FINANCE","Score":null,"Total":0}
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Abstract
The central decision for a pension fund is the allocation between stocks and bonds. For intellectual backup in making this decision, many rely on metrics and methods from Modern Portfolio Theory (MPT). We show how, historically, such an “optimal” portfolio is in effect the least optimal one, as it fails to protect against tail risk and under-allocates to the high-returning asset class. MPT fails in both risk control and real-world investment optimization.
期刊介绍：
The Journal of Alternative Investments (JAI) provides you with cutting-edge research and expert analysis on managing investments in hedge funds, private equity, distressed debt, commodities and futures, energy, funds of funds, and other nontraditional assets. JAI is the official publication of the Chartered Alternative Investment Analyst Association (CAIA®). JAI provides you with challenging ideas and practical tools to: •Profit from the growth of hedge funds and alternatives •Determine the optimal mix of traditional and alternative investments •Measure and track portfolio performance •Manage your alternative investment portfolio with proven risk management practices
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