Michael,
Performance measures always has to be against a benchmark. Otherwise, anyone can do 5 pushups and claim to be the best athlete in the world. Hence, comparison against the market, which is something an investor can very easily invest in, is important. As for which market, that of course depends on access. If an investor is restricted (in any way other than by conscious choice) to certain market segments, only those market segments averages should be considered as a comparative portfolio.
Since you say that you have taken much less risk than the market, at the risk of upsetting you, may I enquire what your yardstick is for measuring risk? Beta definitely has it's limitations. As you have pointed out, it is backward looking. There has been talks of getting more forward looking and directly calculable measures, for example, using the implied volatility instead. I look forward to seeing what your index of risk is.
BTW, MPT never claims that superior investors - whose returns adjusted for risk regularly beat the market - do not exist. It's just that they are vanishingly rare. There are several other investors who take on a lot of risk and outperform (like the Internet day traders, for example).
-BGR. |
