Quote · Excess Returns
We Asked GMO’s Head of Asset Allocation Why This Bubble is Easy — But Investors Will Get it Wrong
Where this was said
Comparing risk and return in 2000, 2007, 2021 and today
At 8:33 · chapter starts 8:12
Ben Inker walks through GMO's risk-reward scatterplots from 2000, 2007, 2021, and today, explaining how the slope of the line reveals whether investors are being compensated for risk [1] — Ben Inker "In 2000, the risk-reward slope was still positive — you were paid less for risk, but still paid. In 2007, the slope went negative: you were…" 10:00 .
In 2000, the risk-reward slope was still positive — you were paid less for risk, but still paid. In 2007, the slope went negative: you were paying for the privilege of taking risk. In 2021, everything had a negative expected real return. Today's slope is 0.1 globally, but 0.4 ex-US.
In 2007, every single risk asset GMO could find was overvalued, and the equal-weighted portfolio looked exactly like the cap-weighted one. There was no diversification escape — you had to move toward the origin, meaning cash, which is career suicide for a portfolio manager.
