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  Issue 8 | Archive   August 2011

Public Lecture on Stochastic Portfolio Theory

"More than a basket of stocks: Why volatility helps portfolio perform" - this was the theme of the latest NUS-RMI public lecture on 4 May, 2011. The public lecture was delivered by Mr. Carl Moss, the London-based Senior Investment Officer of INTECH's International Division, who introduced the Stochastic Portfolio Theory (SPT). SPT exploits the natural volatility of stock prices to construct portfolios and seek to outperform a passive benchmark over the long term with low levels of relative risk, without using return forecasts. It has become the main mathematical theory behind the INTECH's active portfolio strategies and the basis of INTECH's investment process for over 21 years.

Mr. Moss started by introducing the SPT and differentiating portfolio efficiency from market efficiency. Then he gave a simple example to illustrate the concept of volatility capture. He ended the first part of the lecture with further mathematical challenges for the theory. In the second part of the lecture, he discussed the post-crisis challenges faced by active portfolio managers and emphasized that active portfolio management beats passive portfolio management over time. He shared that it is easier to capture alpha relative to a benchmark with the SPT and concluded his lecture by stating that timing is in favour of active over passive portfolio management.

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Published quarterly by Risk Management Institute, NUS
Editor: Ivy Wang (rmiwy@nus.edu.sg)