Put simply, risk premia is the idea that a greater risk should yield a greater return. That is, no rational investor would bear more risk without being compensated for it. Here’s an example. You can play one of two games an infinite number of times in an instantaneous amount of time: one game you flip a coin and win a dollar on heads, tails you pay 99 cents. The other game you flip a coin and either win 1,000,000 dollars or pay 990,000 dollars. Which game would you play? Any rational person would play the former game, it has the same expected value with less risk or less volatility.

I haven’t read this guy’s thoughts on why it’s stupid, but it’s a fundamental underpinning of finance and you would be hard pressed to find any real non-trolling financial professional arguing against it. It’s so intuitive that almost all everyday people would agree.

Further reading would be about the capital market line (CML), the security market line (SML), and the efficient market hypothesis (EMH).

Another idea he thinks is stupid is VaR (value at risk). While there are different ways of calculating it, all it simply means is: what is the probability that my portfolio loses x% of value tomorrow. There’s many ways of calculating it, the simplest being just calculate the historical correlations of all the assets in your portfolio and figure out the portfolio variance. Using linear algebra the variance is:

Var(portfolio) = x^T P x

where x is a column vector of security weights and P a square covariance matrix of all assets. Assuming a normal distribution (a bad assumption btw), we can easily calculate the, day, 5% chance of losing x amount of dollars tomorrow.

Anyways, all I’m saying is that the stuff he’s shitting on (CAPM, EMH, Beta, etc) is so fundamental to the very fabric of finance itself, that he should get a Nobel prize if he actually had any good rebuttals. What he’s saying is like someone proposing an alternative to Newtonian physics in the 18th century. Which would be fine, but if he truly believed in what he was saying he would either have completely remade finance or he would be working in a different industry. Seeing that this firm GMO is working in the asset management space, I find it almost impossible that the employees of said firm aren’t using or don’t believe in the above mentioned concepts. In fact as a finance professional, I bet they believe in and use the aforementioned concepts every day and this guy is just stirring up shit in order for their firm to get more assets.