Picking an asset to invest

Yesterday, Andrew Lo spent some time on a nice graph, discussing attitudes towards risk. Here are four assets (thanks  for improving the terminology), real data (no information here about time, but it’s the same scale for the four of them)

The question raised was quite simple

if you could invest in one, and only one, asset which one will you pick ?

I did ask the question on Twitter, after the talk. And I got the following stats (based on 150 votes)

The assets were here, respectively

The black curve was for a firm that had among the largest exposures to the Bernard Madoff fraud. And here are the curves (again, real data)

Now, if you think about it, it is kind of odd that almost 60% people pick the black one. In a real market, how can we get at the same time the black and the green curve. They both had no risk, and very different return. The black curve has the same return as the SP500 index, without any risk. That should be seen as odd…. Of course, it’s easy to comment, once you see the data, but still.

Added on March 8th 2018: a few weeks ago, @ordrespontane tried the same experience on Twitter, and he got 1150 votes. Interestingly, he obtained similar results, with 60% for the black curve, then a bit less than 20% for the red one, almost 15% for the red one…

Cite this blog post
Arthur Charpentier (2016, May 20). Picking an asset to invest. Freakonometrics. Retrieved February 29, 2024, from https://doi.org/10.58079/ov42

3 thoughts on “Picking an asset to invest”

  1. Without any further info the blue line looks like a trading strategy that had worked for a short period and then steadily lost money – why should one pick this one? Red looks like an equity market with the 2008 drop and recovery after 03/2009 for someone who has seen the charts many times before. The black line is difficult to tell. If you say that this is stock market exposure then this is too good to be true. Without any details on the purpose of this survey one can easily pick it … as DS puts it .. there are many reasons why the charts could look as they do …

  2. Perhaps some viewed both green and black as risk free assets, but one is with and one is without exorbitant management expenses and fees.

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