50 randomly-chosen stocks are much better diversified than 50 stocks that are specifically selected for having a high correlation to a particular outcome (e.g., AI development).
This paper provides some more in-depth explanation of what I was talking about with the math. It’s fairly technical, but it doesn’t use any math beyond high school algebra/statistics.
The key point I was making is that, if markets are efficient, then you shouldn’t expect a 5% (or even 4.7%) geometric mean return from the AI portfolio. Instead, you should expect more like 1.3%. I might have messed up some of the details, but I’m confident that the geometric return for an un-diversified portfolio in an efficient market is meaningfully lower than the global market return. This is not to say that mission hedging is a bad idea, just that this is an important fact to take into account.
50 randomly-chosen stocks are much better diversified than 50 stocks that are specifically selected for having a high correlation to a particular outcome (e.g., AI development).
This paper provides some more in-depth explanation of what I was talking about with the math. It’s fairly technical, but it doesn’t use any math beyond high school algebra/statistics.
The key point I was making is that, if markets are efficient, then you shouldn’t expect a 5% (or even 4.7%) geometric mean return from the AI portfolio. Instead, you should expect more like 1.3%. I might have messed up some of the details, but I’m confident that the geometric return for an un-diversified portfolio in an efficient market is meaningfully lower than the global market return. This is not to say that mission hedging is a bad idea, just that this is an important fact to take into account.
Very interesting- thanks for elaborating!