Dates to CAPM

From: DAX
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Date: 24 Oct 2007
Time: 08:02:18

Comments

I think this problem dates back to CAPM, when Sharpe assumed everyone had identical opinions about market expected returns and covariances. In such a simplified world, everyone measures risk the same. Regulators can base capital requirements based on a firm's risk as opposed to this observer's opinion of the firm's risk or that observer's opinion of the firm's risk. If a trader or dealer knows things the regulator's model doesn't know, he could be taking substantially less risk than the model calculates, or more.

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