Norges Bank’s mandate states the following: "Monetary policy shall be aimed at stability in the Norwegian krone’s national and international value, contributing to stable expectations concerning exchange rate developments. At the same time, monetary policy shall underpin fiscal policy by contributing to stable developments in output and employment.” "Norges Bank’s implementation of monetary policy shall, in accordance with the first paragraph, be oriented towards low and stable inflation. The operational target of monetary policy shall be annual consumer price inflation of approximately 2.5 per cent over time.” The first paragraph of the mandate sets forth its intentions. The last paragraph specifies what Norges Bank is required to do. The first sentence in the mandate refers to the value of the krone. Stability in  5  For a more detailed discussion, see PSG memo prepared by Røisland and Sveen, Norges Bank’s Research Department: PSG memo No. 7, 2002. 6  See Akram, Qaisar Farooq (2000): “When does the oil price affect the Norwegian exchange rate?” Working Paper 2000/08, Norges Bank. 7  See Akram, Qaisar Farooq (2002): “PPP in the medium run despite oil shocks: The case of Norway.” Working Paper 2002/04, Norges Bank. BIS Review 2/2003  5  the internal value of the krone implies that inflation must be low and stable. The sentence also states that monetary policy shall be aimed at stability in the external value of the krone. The krone exchange rate fluctuates from day to day, from week to week, and from month to month.

Researchers have documented and studied how asset valuations seem to move far more on news that affects risk premiums than on news on future cash flows. This was vividly illustrated by the market turbulence of 2008–2009, as well as the last few weeks. In their investigation of why risk premiums vary so much, researchers have moved far beyond the simplest models of introductory finance classes. Theoretical progress, data availability and computational advances have made it possible to study the implications of potentially important features:   investors are different and not necessarily fully informed or rational;    markets are incomplete and have frictions;    returns might have fat tails and face sudden disasters;    and government regulations are important. Models of investor heterogeneity, non-tradable, non-financial risk, market frictions and timevarying uncertainty go a long way in accounting for variations in market risk premiums. This has profound implications for portfolio theory and practical portfolio strategies. Modern portfolio theory builds on differences in defining characteristics between investors. Investors with distinctly different non-tradable, non-financial risk, who are affected differently by market frictions and regulations, should hold different portfolios. In the NBIM Strategy Plan for 2011–2013, we stated that we will implement an investment strategy built on the Fund’s defining characteristics – with strategies that are long-term oriented, scalable, and focused on underlying value. This sentence covers a wide range of interesting questions. All the speakers today will, in fact, offer perspectives on the challenges outlined here.