ALL SWANS ARE BLACK IN THE DARK

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PART I

WHITE SWANS MAY LOOK

BLACK IN THE DARK

SECTION SPOTLIGHT

• Equity analysts are very accurate when markets are calm but they tend to miss their price targets

by more than 50% in volatile markets.

• Credit ratings have historically been very good signals of default; however, ratings must trade-off

accuracy and stability, and the trade-off point chosen by credit analysts may not adequately

transmit risk signals most relevant to different types of investors.

• Credit and equity analysts may be missing long-term, non-linear risks.

• Long-term risks, in particular those with non-linear and non-cyclical risk profiles, are likely to get

missed by financial analysis due to the short-term focus of current risk and valuation models.

• In light of these long-term future risks, long-term investors are potentially exposed to mispriced,

financially material threats.

• The subprime crisis was a case in point. Disruptive trends such as the transition to a low carbon

economy currently raise the attention of financial regulators and intermediaries themselves.

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