I believe your emphasis is a bit off. We expect all investable assets to have the same risk adjusted returns, where risk is whatever the market considers risk, not just volatility / Sharpe ratio. Sharpe ratio is a simplistic model that is has uses but is far from being a full risk adjusted metric.Yes the information should be expected to already be priced in by an efficient market. BUT markets price risk, not expected returns. SV is more risky and thus has a higher expected returns. In an efficient market we expect all investable assets to have similar risk adjusted returns, not similar returns alone; thus we expect all investable assets to have similar Sharpe ratios. I say similar, as opposed to identical, because volatility is only one measure of risk. In the past, I’ve worked my mind into all sorts of knots pondering this stuff. Reminding myself that markets price risk generally gets my brain straight.
Dave
Statistics: Posted by exodusing — Mon Dec 02, 2024 6:00 am — Replies 39 — Views 1498