The Rational Reminder Podcast
Episode 338 - Peter Mladina: Factor Betas and ICAPM in Practice
Jan 2, 2025
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.
01:08:47
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Quick takeaways
- Modern Portfolio Theory (MPT) is criticized for failing to address long-term funding objectives, leading to misaligned investment strategies.
- The Intertemporal Capital Asset Pricing Model (ICAPM) provides a multi-year optimization framework that aligns investments with specific long-term goals.
Deep dives
Shortcomings of Traditional Models
Modern Portfolio Theory (MPT) is critiqued for being an asset-only approach that neglects the funding objectives behind investments. Its limitation as a single-period model focuses primarily on one-year capital market assumptions, failing to account for long-term liabilities or goals. Additionally, MPT does not incorporate a robust theoretical basis for constraints, leading to outcomes driven primarily by imposed constraints rather than asset characteristics. This input sensitivity causes a misalignment between theoretical optimal allocations and actual investment scenarios, highlighting the need for more comprehensive models.
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