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By Nelson Lacey, PhD CFA, Director of CAIA Examinations
When I teach portfolio theory, I often begin with a story about a crisis at an annual shareholder’s meeting of a major corporation. In this story the Chief Financial Officer was discovered to have made investments over the last ten years that have never created a penny of cash flow. Worse, these investments were described as having only a very small chance of an extremely high return, and a very large chance of a zero return. One shareholder stands and asks “how could this have been a good use of our money?”
I then ask my students if the investments made by the CFO remind them of something, and a typical response is yes, that it appears the CFO is speculating in a lottery type scheme that has an...
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