RT Journal Article
SR Electronic
T1 Pension Funds Should Never Rely on Correlation
JF The Journal of Alternative Investments
FD Institutional Investor Journals
SP jai.2022.1.157
DO 10.3905/jai.2022.1.157
A1 Ronald Lagnado
A1 Nassim Nicholas Taleb
YR 2022
UL https://pm-research.com/content/early/2022/02/04/jai.2022.1.157.abstract
AB The central decision for a pension fund is the allocation between stocks and bonds. For intellectual backup in making this decision, many rely on metrics and methods from Modern Portfolio Theory (MPT). We show how, historically, such an “optimal” portfolio is in effect the least optimal one, as it fails to protect against tail risk and under-allocates to the high-returning asset class. MPT fails in both risk control and real-world investment optimization.