The quadratic utility function balances two conflicting objectives: more return and less risk. It is a way to pick one portfolio on the efficient frontier. Investors initially assumed that the active risk aversion parameter was the same as the total risk aversion parameter, but we show that they are different and ask the question – is this still relevant today?
It is a common misconception that equities generally react similarly to bonds (and any other assets with fixed future cash flows) when faced with rising interest rates. Traditionally, asset owners—especially those managing defined benefit plans—looked to fixed income to hedge their liabilities (together with other asset classes). But is this really the best approach? Duration […]