Eliezer, your use of the term ‘risk free bonds rate’ is confusing. There is clearly no such thing a risk-free bond, so the notion of a risk-free bond rate doesn’t seem to make sense. True, it’s not impossible to lose money in short treasuries, but this has nothing to do with what’s more commonly known as the ‘risk-free rate’ in modern portfoio theory.
The ‘risk-free rate’ is simply shorthand used to refer to a particular input to modern asset valuation models. It says nothing about a given security’s total inflation-adjusted return, nor is it a conclusion drawn from a given government’s past default history. The interest paid on short treasuries is considered risk-free in the limited context of asset valuation simply because a government can theoretically print as much money as it needs to pay the coupon.
That said, you’re also correct to point out that in English the descriptor ‘risk-free’ suffers from imprecision. But this is just what happens when the shorthand names for inputs to mathematical models bleed over into the vernacular. That is, from a semantic standpoint ‘risk-free’ doesn’t mean risk-free.
And I can certainly appreciate your poke at Taleb for not explicitly acknowledging potential black swan events affecting short treasuries. But as you know, he assumes you want positive returns on your money and is suggesting what he sees as the most optimal balance between risk and return in a 100% invested portfolio. Not that he’s right or wrong about any of it.
Eliezer, your use of the term ‘risk free bonds rate’ is confusing. There is clearly no such thing a risk-free bond, so the notion of a risk-free bond rate doesn’t seem to make sense. True, it’s not impossible to lose money in short treasuries, but this has nothing to do with what’s more commonly known as the ‘risk-free rate’ in modern portfoio theory.
The ‘risk-free rate’ is simply shorthand used to refer to a particular input to modern asset valuation models. It says nothing about a given security’s total inflation-adjusted return, nor is it a conclusion drawn from a given government’s past default history. The interest paid on short treasuries is considered risk-free in the limited context of asset valuation simply because a government can theoretically print as much money as it needs to pay the coupon.
That said, you’re also correct to point out that in English the descriptor ‘risk-free’ suffers from imprecision. But this is just what happens when the shorthand names for inputs to mathematical models bleed over into the vernacular. That is, from a semantic standpoint ‘risk-free’ doesn’t mean risk-free.
And I can certainly appreciate your poke at Taleb for not explicitly acknowledging potential black swan events affecting short treasuries. But as you know, he assumes you want positive returns on your money and is suggesting what he sees as the most optimal balance between risk and return in a 100% invested portfolio. Not that he’s right or wrong about any of it.