When the law ignores diversification
A regulatory shift in the 1980s not only transformed how trust funds invested, but also improved their performance and offered a key lesson on how the law can shape — and distort — markets.
A legal change can transform how thousands of institutions invest — and significantly improve their outcomes. In this episode of Risk and Return, we explore how a regulatory reform in the United States redefined the concept of prudence in investment and finally allowed trust funds to apply one of the most fundamental principles of finance: diversification.
Together with Emanuele Rizzo, Professor in the Department of Economics, Finance and Accounting at Esade, we examine how, for decades, these investors were constrained by a rule that evaluated each asset in isolation. This approach distorted portfolios and reduced efficiency. The shift toward a portfolio-based perspective not only changed investment decisions but also improved the risk-return trade-off and had visible effects on market prices.
Hosted by Professor Omar Rachedi, Risk and Return features conversations with leading academics and practitioners, cutting through jargon to explore how markets, firms and policies shape our world.