CAPM’s problem? Our quest for “status” over “wealth”.
| Apr 6th, 2007 | Filed under: CAPM / Alpha Theory | By: Alpha Male |
|
Why Risk is not Related to Return
By: Eric Falkenstein
Published: February 28, 2007
Hat tip to the CXO Advisory blog for bringing this recent paper to our attention. It’s an interesting addendum to our posting on beta arbitrage last month. As you may recall, Tuomo Vuolteenaho, a Harvard prof moonlighting at ArrowStreet in Boston said that high beta stocks didn’t actually provide the higher returns that CAPM would suggest. As a result, he said, an investor should short high beta stocks and go long low beta stocks.
This paper (written by a mysterious author from a suburb of Minneapolis who is listed in SSRN – a database of academic papers – as having “no affiliation known“) argues that this apparent paradox can be explained by a human desire for relative, as opposed to absolute wealth – what the author calls “relative status”. This is an innovative way to approach the CAPM conundrum since it essentially mixes traditional financial theory with recently topical “happiness” research.
Falkenstein lays out the paradox: More…
To continue reading this article please login (at the right) or click here to learn more about accessing our archives.
