Читать книгу Competitive Advantage in Investing - Steven Abrahams - Страница 23

Sharpe's approach also led to another powerful conclusion about the value of available investable assets, a conclusion that ever since has broadly set the terms for evaluating assets and investment managers.

Sharpe noted that if every investor decided to invest at least partially in the same risky portfolio, then the assets included in that portfolio would rise in value. A higher price would mean a decline in potential return compared to assets outside the initial portfolio. The assets outside the initial portfolio would become more attractive, and investors would look for portfolios that included the previously excluded assets. The value of those assets would rise until they aligned with the value of the initial portfolio, and investors' search for the next margin of excluded assets would continue. The value of included and excluded assets would continue to change until all assets had a place in at least one portfolio that lay along the capital market line—portfolios that promised a constant extra measure of return for each extra measure of risk (figure 2.3). Not all portfolios would have to include the same assets, but all portfolios would offer a combination of risk and return that matched at least one possibility along the line. And all portfolios along the capital market line would produce returns perfectly correlated with one another.

Sharpe then made the case that the value of any investment depends only on the amount of risk the asset shares with portfolios along the capital market line. Think of that as the risk of overall economic growth or decline. The remaining risk in an asset was unique or idiosyncratic. It could reflect the unpredictable effects of personnel or reputation or local markets or other factors. By combining investments, a portfolio could balance bad luck on one investment with good luck on another, just like the effect of flipping multiple coins can balance out into a smooth set of outcomes. But the core, systematic risk in an investment an investor cannot diversify away. And if the investor cannot eliminate the risk, then the investor needs fair compensation.

The expected return on any specific asset, according to Sharpe, reflects the expected return on the riskless asset, the expected return on the market portfolio of risky assets, and the proportion of risk that the specific asset shares with the market portfolio. In the world of CAPM, the expected return on a specific asset becomes . The expected return on the riskless asset becomes . The return on the market portfolio becomes , and the excess return on the market portfolio above the riskless return becomes . Finally, the excess return on the market portfolio is multiplied by a number, , or beta, which indicates whether the specific asset is more or less risky than the market portfolio overall.¹ If the asset is more risky, beta is greater than 1; if it is less risky, beta is smaller than 1. All of these pieces fit together in a simple equation that revolutionized finance in the same way that Einstein's equation revolutionized physics:

Figure 2.3 Steady investment in portfolios along the capital market line raises their price and lowers return, flattening the population of attainable investments against the line.

An asset's expected return depends on the riskless rate and a multiple, , of the excess return on the market portfolio. The return on the complete market portfolio of investable assets has to reflect the broad return to the overall economy. Returns to some assets in that portfolio will rise and fall faster than the overall economy, and returns to others will rise and fall more slowly. Returns on a government bond, for instance, might only rise and fall modestly with changes in the economy. Returns on a corporate bond, however, might rise and fall more as the issuer's profits and prospects change. Returns on corporate equity might vary even more, with the equity of a large, established company varying more than the equity of a new entrant.

In CAPM, the multiplier, , measures the proportion of risk a specific investment shares with the market portfolio. Assets with returns more stable than the overall market will have a value of less than one, assets with return more volatile will have a greater than one, and assets with no shared risk at all will have a of zero. A of zero is the definition of a riskless asset!

The assumption of riskless lending and borrowing for all investors in the Sharpe and Linter framework immediately came under scrutiny, but Fischer Black in 1972, then at the University of Chicago, showed that the general relationship between and expected return holds even without a riskless asset (Black, 1972). Black substituted a limitless ability to sell any asset short and still found that an asset's expected return depends on scaled by an asset's return premium over a more general asset uncorrelated with the market. An asset uncorrelated with the market echoes the idea of a riskless investment, but Black's model does not require this asset to return a riskless rate. Black only requires that the expected return on an uncorrelated asset is less than the expected return on the market portfolio. In other words, must be positive.

CAPM has provided much of the intellectual foundation for arguments that investors should hold positions along the capital market line because that is the only risk for which investors get compensated. The portfolio manager's job simply becomes deciding how to leverage or deleverage the exposure to the market basket.

CAPM also obviously implies a fair value for an asset's expected return. That value should line up with its beta. An asset with a beta of one should have the same return as the market basket, and an asset with a beta of two, for instance, should have twice the return. This is also the same framework for estimating the cost of equity capital. Once an analyst has calculated a beta or for a company, the return on equity required by CAPM immediately falls out.

CAPM has encouraged the use of market indices in evaluating the performance of asset managers. A manager who holds a portfolio along the capital market line will show excess returns—returns beyond the riskless rate—with a beta that reflects the portfolio's risk position. If the manager holds only the riskless asset, for example, the excess return and the beta would be zero. If the manager holds only the risky asset, the beta would be 1. If the manager borrows at the riskless rate and invests the funds in the risky asset, the beta will be greater than 1. Investors that put $1 of their own money in the risky asset and then borrow $1 to buy more of the risky asset, for example, would show a beta of 2 because a 1% gain or loss on the risky asset would create a 2% gain or loss on the original invested money. A simple regression of the manager's periodic excess returns on the excess returns from the risky asset would produce estimates of beta. After adjusting for the manager's beta, a portfolio that sat somewhere along the capital market line would show no excess return over the market basket. In a regression, it would show no alpha.

CAPM has framed investment performance on individual investments and funds in terms of alpha and beta. Because a range of cash and derivative instruments such as index funds, exchange-traded funds, futures, and swaps has made it relatively easy to get exposure to the market basket, the value of simple beta exposure is low. Almost any individual or institution can get beta exposure at low cost and with great liquidity. Managers instead try to produce alpha or excess return beyond the level in an index portfolio. This is valuable because the aggregate market alpha is zero. Managers should get paid well for delivering alpha. This sets a high bar for manager performance. As investment analysts Richard Grinold and Ronald Kahn note (1999), one implication of CAPM is that “investors that don't think they have superior information should hold the market portfolio. If you are a ‘greater fool’ and you know it, you can protect yourself by not playing” (p. 17).