“Realativity” in Finance: How a Simple Assumption Led to Many Crises


“Relatively” in Finance: How a Simple Assumption Led to Many Crises
Arun Muralidhar, Ph.D., Mcube Investment Technologies LLC


Investment theory has implications for asset allocation, asset pricing, and risk-adjusted performance. The statement in finance that “investors maximize the utility of wealth,” is largely incorrect assumes that investors are principals with a deterministic goal. Recommendations from theory are often (blindly) adopted resulting in meaningful systemic risks. Instead, investors delegate to maximize (multiple) goal(s) relative risk-adjusted returns. Investors care about whether their managers are lucky/skilled and their IPSs tell their exact risk specification. This Op-Ed examines the implications for asset allocation, rebalancing, factor investing, fees and regulations, highlights attempts to resolve challenges, suggests innovations, and argues for a relative investment theory paradigm to capture the realities of investing.

Free Subscription!

The Journal of Performance Measurement

The Performance Measurement Resource.

Click to Subscribe