Fresh Perspectives for European Investors: Currency, Asset Allocation, and Risk Management

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The European Investment Conference challenges participants to become agents of change in our industry, by first changing their investment processes, practices, and their own mindsets. With this worthwhile ambition in mind we have prepared a pre-conference reading list from previous CFA Events.

Checking assumptions often means taking a look in the rearview mirror. A summary of the Financial Market History Roundtable, held in London late last year, asks that very question: What are the key lessons of financial market history, and how can investors apply those lessons? Participants including Saker Nusseibeh and Robert Jenkins, FSIP, shared some thoughtful answers. Next on our list, Paul Woolley explores The Fallibility of the Efficient Market Theory: A New Paradigm, seeking answers to what went wrong in recent years and taking a swipe at many investors’ favourite models. In Currency Wars Revisited, James Rickards argues that the Fed’s equilibrium model doesn’t work when economic sectors are highly integrated and points out that the financial system is more integrated than ever before.

Finally, as a precursor to some mind-challenging ideas at our Conference, consider how Thomas M. Idzorek, CFA, in  Evaluating New Methodologies in Asset and Risk Allocation, and Sébastien Page, CFA, in Risk Management beyond Asset Class Diversification, find fresh perspectives to age-old problems – how to allocate assets in uncertain times.

  • Financial Market History Roundtable, London: This article comes from a roundtable held in London at Cass Business School on 11 June 2013, the first of several roundtables on the subject as part of the Future of Finance initiative. With a goal of improving investment decision making in the future, the panel of experts was asked to answer this question: What are the key lessons of financial market history, and how can investors apply those lessons?
  • Currency Wars Revisited: Central banks around the world have tried to stimulate their economies with a coordinated increase in their money supplies but without the destabilizing currency depreciations witnessed in the past. Although the US dollar has depreciated, emerging countries have enjoyed currency appreciation. Despite trillions of dollars added to the US money supply since the financial crisis, growth remains sluggish because people are not borrowing or spending. The Fed’s equilibrium models fail to capture the reality that economic sectors are highly integrated and reliant on the financial sector even more now than before the financial crisis.
  • The Fallibility of the Efficient Market Theory: A New Paradigm: The efficient market theory has failed to explain the market behavior and asset pricing of recent years. A new model that incorporates the principal–agent problem and addresses the dilemma of asymmetric information explains what has previously been unexplainable.
  • Evaluating New Methodologies in Asset and Risk Allocation: Risk parity strategies favor bonds over equities, but they do not necessarily outperform a static portfolio of 60% equity/40% bonds. Portfolio optimization is evolving beyond traditional Markowitz mean–variance optimization to incorporate the higher moments of skewness and kurtosis, which are applicable to alternative investments.
  • Risk Management beyond Asset Class Diversification: Asset allocation is evolving into an approach based on forecasts driven by macroeconomics and risk factor diversification. The dynamic nature of markets requires both secular and cyclical investment horizons. In addition, investors should look beyond volatility as a measure of risk and explicitly estimate the risk of tail events.

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Please note that the content of this site should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute.

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