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  • Writer's pictureRyan Lynch

Price of Risk - Corporate Beta or Asset Volatility?

A recent piece from MIT Sloan School of Management demonstrates the improper pricing of risk when using the CAPM Model "beta" adjuster alone, for acquisition orientated transactions. The article advocates a more holistic approach to risk, as we undertake for maritime investments, one founded on understanding the interactivity of operational, financial as well as macro-risk variables, and the elasticity effect of each on portfolio returns.


At Maritime Opportunity Investment Corporation, we have often advocated to incorporate a broader understanding of volatility and real valuation into our investments, and reduce the incorrect deployment of statistical models. Most especially for the oil-tanker market and how the market returns effect the public "pure-play" platform companies.


Our recent paper finds the average volatility of the operating asset returns are well in excess of equity market beta assumptions due to the incorrect assumption of independent and identically distributed returns (i.i.d). Additionally, while convinient, we find the usage of models based on normal distribution of returns to be "square peg round hole" which are seldom the case in practice.


These issues are at their core data integrity questions and are integral in the pricing and monitoring of risk capital. When undertaken incorrectly, inferences from poorly aggregated data can broadly undermine any investment thesis.


Of course the management decisions and corporate structure do serve to mitigate asset level volatility thanks to prudent portfolio construction, robust financing, strong operational performance and network connectivity. But the difference in our volatility assumptions and average implied betas for observable companies is material enough to investigate.


For further and a more in-depth analysis of the market risk spillover effect, please email ryan@maritimeoic.com


MOIC - Risk
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