Skip to main content
The Actuary: The magazine of the Institute and Faculty of Actuaries - return to the homepage Logo of The Actuary website
  • Search
  • Visit The Actuary Magazine on Facebook
  • Visit The Actuary Magazine on LinkedIn
  • Visit @TheActuaryMag on Twitter
Visit the website of the Institute and Faculty of Actuaries Logo of the Institute and Faculty of Actuaries

Main navigation

  • News
  • Features
    • General Features
    • Interviews
    • Students
    • Opinion
  • Topics
  • Knowledge
    • Business Skills
    • Careers
    • Events
    • Predictions by The Actuary
    • Whitepapers
  • Jobs
  • IFoA
    • CEO Comment
    • IFoA News
    • People & Social News
    • President Comment
  • Archive

Topics

  • Data Science
  • Investment
  • Risk & ERM
  • Pensions
  • Environment
  • Soft skills
  • General Insurance
  • Regulation Standards
  • Health care
  • Technology
  • Reinsurance
  • Global
  • Life insurance
Quick links:
  • Home
  • The Actuary Issues
  • May 2012
05

Global crash 'signalled failure of portfolio theory'

Open-access content 10th May 2012

Events of the past four years since the onset of the global economic crisis have proven modern portfolio theory and practice wrong, according to a group of chief investment officers.

2

The 300 Club, which includes representatives from companies such as Aon Hewitt and Schroders, said the belief that markets are efficient and that active investment management does not work was 'untrue'.

Based on the view that risk is the centrepiece of portfolio management, the capital asset pricing model and the efficient market hypothesis had become the drivers behind portfolio theory, the club's report, The Death of common sense; how elegant theories contributed to the 2008 market collapse, explained.

CAPM leads to the conclusion that active management cannot add value to investments, while EMH states it is impossible to 'beat the market'. However, in its report, The 300 Club highlighted anomalies which deliver higher returns that cannot be explained by the EMH.

Professor  Amin Rajan, the report's author, said: 'The anomalies mean that the whole paradigm of rational expectations that reigned supreme for nearly fifty years is no more than an ideological aspiration about how markets ought to work under the tenets of neo-classical economics.

'The crash-landing of its two cherished idols - CAPM and EMH - in 2008 shows all too well that they were as remote from the complexities of markets as the man on the moon.

EMH had cultivated a belief that the market is always right, turning investing into a science with modern innovations such as derivatives, shorting and high frequency trading. This approach has resulted in systemic risks, complexity in products and higher charges, the report said.

It has also, Professor Rajan said, 'depersonalised' relations between investors and their asset managers. 'Unlike their physical counterparts, investment products do not have a definable shelf life or have predictable outcomes,' he said.

'For good returns, what matters most is timing and market environment - both of which require a far higher degree of engagement between investors and their managers than has been the case over the past 20 years.'

This article appeared in our May 2012 issue of The Actuary.
Click here to view this issue
Filed in:
05
Topics:
Investment
Share
  • Twitter
  • Facebook
  • Linked in
  • Mail
  • Print

Latest Jobs

Reinsurance Pricing Lead

England, London
£40000 - £75000 per annum
Reference
118905

Senior Pricing Actuary

London, England
£60000 - £110000 per annum
Reference
118904

Pricing Actuary (Casualty)

England, London
£60000 - £80000 per annum
Reference
118903
See all jobs »
 
 
 
 

Sign up to our newsletter

News, jobs and updates

Sign up

Subscribe to The Actuary

Receive the print edition straight to your door

Subscribe
Spread-iPad-slantB-june.png
​
FOLLOW US
The Actuary on LinkedIn
@TheActuaryMag on Twitter
Facebook: The Actuary Magazine
CONTACT US
The Actuary
Tel: (+44) 020 7880 6200
​

IFoA

About IFoA
Become an actuary
IFoA Events
About membership

Information

Privacy Policy
Terms & Conditions
Cookie Policy
Think Green

Get in touch

Contact us
Advertise with us
Subscribe to The Actuary Magazine
Contribute

The Actuary Jobs

Actuarial job search
Pensions jobs
General insurance jobs
Solvency II jobs

© 2020 The Actuary. The Actuary is published on behalf of the Institute and Faculty of Actuaries by Redactive Publishing Limited, Level 5, 78 Chamber Street, London, E1 8BL. Tel: 020 7880 6200