Efficiency and Risk
Students often believe that asset classifications that are efficient have lower risk profiles than asset classifications that are relatively inefficient. Rather, asset risk and efficiency profiles are not dependent nor are they highly correlated.
That is, an efficient asset classification (e.g., NYSE traded stocks) could be high risk (e.g., bio tech company), and an inefficient asset classification (e.g., real estate) could be relatively low risk (e.g., stand-alone manufactured housing community properties in Florida).
Both risk and efficiency matter, but they should be considered separately when profiling an asset classification.
Posted on Wed, March 3, 2010
by Timothy E. Moffit