Posts Tagged: Modern Portfolio Theory

Stiglitz, smart as he is, is allowing himself to be distracted by the President’s tendency to wander off in to irrelevant details that make good sound bites. Sure, forbid proprietary trading by commercial banks if you like; it won’t hurt. But it was utterly irrelevant to the crisis. Also the rule would tend to extend [...]

As we show in Panic, the fundamental theorem of Modern Portfolio Theory, which has been the cause of every major market crisis of the past 20 years, is that returns are a linear function of risk: more risk (volatility) equal higher returns. If the hedge fund movement has one uniting principle, it is rejecting this idea.