Fischer tries to explain the world through the CAPM. Timid people may use the CAPM to limit their risk while aggressive people would use the CAPM to find more risk. CAPM could be used not only to assess stock risk, but also riskless borrowing and lending. The bank could use CAPM to determine how much money to lend to high-tolerance people based on deposits from low-tolerance people. CAPM would be used to balance the money supply between stocks and banks, and between lenders and borrowers. No need for government policy.
Fischer’s CAPM could be applied to business cycles and life events, as well. More risky endeavors may return higher average yields, but would fluctuate more than a less risky option. Instead of the government intervening when, say, a certain crop doesn’t return an expected yield, people should understand the risk they took on and alter their plans accordingly.
Even though the world is not perfectly efficient and logical, Fischer, intently fascinated, believed the CAPM can explain many concepts in a field known today as macroeconomics.
A for John Doe.
ReplyDeleteBlack is starting to think of the CAPM as a model of the world as a whole. Life is a series of investments, whose payoffs depend critically on the world around you. For example, a marriage is more likely to be successful if the economy is good.
What the CAPM is saying (directly) is that 1) stock returns are driven primarily by market returns, that 2) to an individual the risk of an individual stock can be largely diversified away, and 3) an investor can adjust their risk and return by mixing different proportions of risk-free assets with the market.
What the CAPM is saying (indirectly) is that 1) the payoffs of life decisions are driven by macro scale events, 2) a lot of the variability of individual life decisions can be diversified away, and 3) you can choose the level or risk you're comfortable with by being more or less involved in the world around you.
So, for you, 1) the payoff to your SUU education is largely driven by whether the economy you end up working in can utilize those skills, 2) the risk of taking one particular class with one particular instructor can be largely eliminated by diversifying across different classes and professors, and 3) you can choose your overall level of risk by the extent of your engagement with the broader world (so staying in Cedar City is very low risk).
I referred to Black's interpretation in this section a few posts back. To Black, CAPM seemed a good way to describe the world, but efficiency was not. He saw the current world as being still inefficient, but on its way to greater efficiency through the judicious use of the CAPM.