The Rational Reminder Podcast

Episode 338 - Peter Mladina: Factor Betas and ICAPM in Practice

21 snips
Jan 2, 2025
Guest
Peter Mladina
In this insightful discussion, guest Peter Mladina, an Executive Director at Northern Trust Wealth Management and UCLA professor, shares his expertise on asset allocation and factor investing. He critiques the limitations of Markowitz's Modern Portfolio Theory and explains how the Intertemporal Capital Asset Pricing Model enhances portfolio construction. The conversation highlights the importance of aligning investment strategies with personal financial goals, explores liability hedging, and examines the evolving definition of risk in modern wealth management.
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INSIGHT

MPT Shortcomings

  • Markowitz's Modern Portfolio Theory (MPT) has shortcomings.
  • It's asset-only, single-period, and lacks a sound theory for constraints.
INSIGHT

CAPM's Pros and Cons

  • The Capital Asset Pricing Model (CAPM) partially resolves MPT issues but introduces new ones.
  • It remains asset-only, single-period, has cash aversion, and assumes only one risk factor.
INSIGHT

ICAPM Advantages

  • The Intertemporal CAPM (ICAPM) improves on MPT and CAPM by addressing funding objectives.
  • It's asset-liability focused, multi-period, uses market efficiency for constraints, and redefines the risk-free asset.
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