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Black Swans, Major Events & Factor Returns

How to Prepare For the Unexpected?

Nicolas Rabener
10 min read
25 Mar 2019

SUMMARY

  • It is questionable if investors should prepare for catastrophic events
  • Factor returns are almost random after black swan and major events
  • Simple diversification is likely the best option for the expected and unexpected

INTRODUCTION

Investors fear black swan events, although it can be argued that this fear is irrational. The black swan theory is a metaphor that describes a surprise event that has a major impact and is often rationalized with hindsight. A recent example would be the global financial crisis, which seems obvious from today’s perspective as the house price appreciation and subprime lending was unsustainable, but was almost impossible to predict beforehand.

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