the thing about expectations reward to justify risk is the sharpe ratio. simplified it is
expected return/expected risk (standard deviation)
the higher the result implies more reward for less risk (target range from greater than 1 onward)
the lower the result, well, less reward more risk
the pension math (greater than 1 in 1995 to less than .5 in 2015)
1995 2005 2015
er 7.5 7.5 7.5
sd 6.0 8.9 17.2
<1 nbsp="" p="">
<1 nbsp="" p=""><1 nbsp="" p=""> it is remarkable that the expected return of 7.5 % per annum has held constant despite greater pension deficits
accepting that fiction the risk now required to achieve the return (17.2 v 6) is roughly 3x and the asset classes that required specialized expertise has expanded to 63% equity 13 % real estate and 12 % private equity (the last of which is only liquid if markets remain priced for multiple returns on exits that may take 7 years or more)
the increases in required risk carries with it an opportunity for the 12 families of the derivative trade to market obtuse, alpha products which are mysteries to its own designers tied to all asset classes and spinoffs
over $800 trillion of these potential nukes exist today inbound and hot ( over 10x global gdp) and the only debate is the when of the trigger not whether
manana
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