The G-Spread: A Business-Economics-Based Measure of Permanent Capital Loss Risk

Karthik Ramakrishna Suresh

MPRA Paper from University Library of Munich, Germany

Abstract: This paper introduces the G-spread, a measure of permanent capital loss risk offered as an alternative to the price-based metrics that dominate contemporary finance: the Capital Asset Pricing Model, Value-at-Risk, beta, standard deviation, and the Fama-French multi-factor model. The G-spread quantifies the return a business earns above its weighted average cost of capital after accounting for reinvestment requirements, incorporating a terminal-growth adjustment calibrated to an AI-era operating environment. The central argument is epistemological: price-based models measure volatility, whereas the risk that matters to long-horizon equity investors is the permanent loss of capital. Because the two are weakly correlated, volatility-based models can misclassify structurally sound businesses as risky and structurally fragile ones as safe. Using eleven worked examples from Indian equity markets and a 227-company retrospective study spanning India, the United States, China, and Japan, the paper tests whether the G-spread identifies the direction of long-run value creation and destruction more reliably than the price-based benchmarks. Across the four markets, holdings flagged EXCLUDED by the financial-health gates returned an average of −12.9% per year, beating the benchmark in only 2% of cases, while holdings classified LOW RISK delivered average excess returns of 10.8 percentage points above the benchmark, beating it 93% of the time. The findings suggest that grounding risk measurement in business economics rather than price behaviour better captures the loss exposure long-term investors actually bear.

Keywords: permanent capital loss; risk measurement; weighted average cost of capital; reinvestment; terminal growth; CAPM; value-at-risk; Fama-French; value investing; Indian equities; cross-market study (search for similar items in EconPapers)
JEL-codes: G11 G12 G15 G17 G32 (search for similar items in EconPapers)
Date: 2026-06-02, Revised 2026-06-02
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