Barron's Criticism, Determinants of Investment Return

This lecture is a guest lecture by Professor David Swensen, Yale University's Chief Investment Officer. The starting point for Professor Swensen is an article entitled Crash Course, published in Barron's in the wake of the financial crisis from 2007-2008. This article blames his endowment investment approach for a failure of diversification and an overemphasis on alternatives.

Subsequently, Professor Swensen characterizes three major determinants of investment return--asset allocation, market timing, and security selection--and outlines the importance of asset allocation as the predominant component.

Against the background of these three tenets, he revisits Barron's criticism and defends the virtues of diversification against an exaggerated perception of the needs for safety in the immediate aftermath of a crisis. Moreover, he counters the critique of overemphasizing alternatives with a longer-term view on the performance of the Yale portfolio.

In the concluding question-and-answer session, he elaborates on the difference between endowment management and fund management, recent developments in the hedge fund and private equity fund industry, and on measures of investment performance beyond the Sharpe ratio.\_E

A multiple-choice quiz related to this lecture can be downloaded below:

Multiple-Choice Quiz (with answer key) [PDF]

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