I mentioned this to an officemate years ago once, but I never was quite satisfied with the explanation that there is a certain amount of excess return built into the price of a company’s stock as its risk premium, but which can be diversified away through some portfolio of disparate stocks.

If, merely by holding a diversified portfolio, the aggregate risk can be reduced, then one would expect the return demanded for such a portfolio to be less than the sum of the returns of the individual stocks. Yet this is not the case. So we must assume either the portfolio is overperforming, the individual stocks are underperforming, or both. On the other hand, it would seem that the risk premium of any individual stock would be arbitraged away by people holding the most diversified portfolios containing it, thus it is strange that an individual stock could retain an undiversified risk premium. Thus it must not, at least not fully. Its return (and the price it sells for) is also determined by the availability for sale of other not-fully-correlated stocks and their characteristics, even ones that have no material effect on the company’s performance. This is a sure sign of value arising from the demand for the instrument unrelated to its underlying. It would seem to be mispriced as an individual stock. Perhaps an equilibrium will be struck, but it is still paradoxical to talk about the risk premium of individual stocks as a property of that stock alone.

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Some kid named Sameer Mishra won the national Spelling Bee a couple of days ago. He is Indian. It occurred to me that there was definitely another Indian who won the Spelling Bee not long ago, so I looked it up. Turns out there were 4 in just the last 7 years, so Indians have pretty much taken over the contest. This article tries to guess why — I’ll defer my own explanation till later.

Then I decided to look at the other teenage academic contest, Mathcounts. A Darryl Wu won this year’s national contest. Obviously he is Chinese, but there has also been 9 Chinese winners in the last 12 years.

So there you have it, Indians and Chinese basically split the major academic contests at the secondary school level between themselves. What’s the explanation? Demographically, there has been a major explosion of educational immigration from both China and India since the late 1980s, and especially in the 1990s. This has resulted in a veritable brain drain in the home countries, but the side effect is that the second-generation Indians and Chinese growing up in the US are beginning to show what might be called the “disproportionality effect”: levels of achievement not matched by population numbers.

Of course, it’s the so-called “elites” that come to the US, but those countries have large enough base populations and enough reserve “elites” that what these kids achieve as they move through the US school system might just be a harbinger of what an undistorted, competitive world will look like in 20-50 years.

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