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The Missing Risk Premium: Why Low Volatility Investing Works Paperback – August 16, 2012
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Top Customer Reviews
Falkenstein argues that there is no risk premium, and never was, so conventional investing advice is misguided. He has developed a consistent and plausible alternative explanation. This is a valuable argument, even if it is ultimately not correct. You cannot understand risk premium if you think it is obvious, you need to see why it might not exist to see how to look for it.
The book also describes an investment approach, a version of what is generally called low-volatility investing. The author is among the pioneers in this area and he advocates a reasonable version of it.
When I reviewed the author's first book, Finding Alpha, I complained about the $95 list price and suggested it should be $25 list to sell for $15 at Amazon. I don't know if he was paying attention, but if he was, he traded through my bid by a nickel. Unfortunately he didn't listen to my complaints about the copy editing and production values.Read more ›
I would group the book's chapters as follows:
* Chapters 2-3 (24 pages), which discuss economists' work on modeling asset risk and return.
* Chapter 4 (53p), which points to poor returns for a number of risky assets and investment strategies.
* Chapter 7 (12p), which surveys common rationalizations of findings similar to those of Chapter 4.
* Chapters 5, 6, 8 (36p), which advance the alternative of modeling investors as caring about their wealth *relative to others*.
* Chapter 9 (8p), which sets out the author's investing approach.
The book's title, "The missing risk premium: why low-volatility investing works", is confusing. Falkenstein's "low-volatility investing" means, on different pages, either avoidance of high-volatility stocks, or selection of the minimum-volatility portfolio in a Markowitz problem (not so contrarian after all), or a combination of both. If it works, it isn't because of a missing risk premium, as neither the deceased straw man of CAPM (whose introduction in Chapter 2 omits a list of assumptions, which most textbooks feel obliged to state and discuss), nor its multifactor nephews, posit a risk premium for total volatility in the first place.
Underperformance of a priori "risky" assets (if conclusively shown) does not immediately imply a negative risk premium, if systematic expectational errors - or, trivially, risk-loving preferences, if we choose to remain in the rational-expected-utility-maximizer framework - have not been ruled out.Read more ›
In the chapter that makes up the bulk of the book Falkenstein reviews 25 different assets and in all but in a few cases there is either no correlation between higher risk taking and expected returns or the correlation is actually negative. There simply is no such thing as a "linear courage premium". Only in a handful of cases is exposure to a higher level of risk rewarded by higher returns. The positive risk premiums are a) short end yield curve, b) BBB-AAA corporate spread, c) REITs and d) gross equity return. The reason for the "gross" in equity returns is that Falkenstein argues that the actual returns the average equity investor historically has received after taxes, poor market timing, transaction costs and geometric averaging are close to the risk free rate.
The reason that positive risk premiums are so rare is, according to Falkenstein, that humans are more motivated by envy than by greed, that is they are more interested in their relative than in their absolute position.Read more ›
Most Recent Customer Reviews
This book is a short but efficient description of the role of volatility in economics. In fact the equities have a rate of trend that is very particular, because their volatility... Read morePublished 1 month ago by Edoardo Angeloni
This was a really interesting read, especially for readers familiar with CAPM and traditional portfolio theory in general. Read morePublished 7 months ago by Kang-Li Cheng
The Missing Risk Premium is an important book, and at times quite entertaining and betrays a gifted intellectual reach. Read morePublished on June 2, 2013 by Andrew D. Martin
Mr. Falkenstein has some interesting ideas but, his book is badly in need of a first rate professional editor. Read morePublished on February 8, 2013 by Cultured Reader
As full disclosure for this review, I am friends with the author. I am also a quant with a science background which has avoided standard economic theory brainwashing about the way... Read morePublished on December 27, 2012 by David R. Kent
I'll preface this review by stating up front that I'm a reader without an academic finance background and as such, a significant part of the book is almost unintelligible (mainly... Read morePublished on December 2, 2012 by The Creature
Lots of interesting info though the formulas and buzz words are over my head and i think would be for anyone but a statistician or polymath.Published on November 26, 2012 by Michael H Thomas
I found myself so distracted by the numerous typos and grammatical mistakes on my kindle that it interfered with my being able to follow the ideas that are important.Published on November 22, 2012 by trader
A lot of books that I have seen take a basic idea and then figure out a way to stretch it out into a book. This book is the exact opposite. Read morePublished on November 6, 2012 by JoshK