When Investment Theory Fails: Leverage
The concept appeals, but the reality does not.
I had intended this column to be something else.
Last week, I summarized William Sharpe’s long-standing claim that aggressive investors should leverage the market portfolio, rather than buy ever-riskier stocks. For one, argued Sharpe, the leveraged-market portfolio is better diversified. For another, discovered future researchers, those riskier stocks aren’t much good. They reliably deliver extra volatility—but not often extra returns.