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

This paper introduces the G-spread, a risk measure formulated by Karthik Ramakrishna Suresh, as an alternative to the five dominant price-based risk metrics in contemporary finance: the Capital Asset Pricing Model (CAPM), Value-at-Risk (VaR), Beta, Standard Deviation, and the Fama-French multi-factor model. The G-spread measures the excess return a business generates above its Weighted Average Cost of Capital after accounting for reinvestment requirements, calibrated with an original AI-era terminal growth adjustment that no prior published model contains.

The central thesis is epistemological: the traditional models measure the wrong thing. They measure price volatility when the actual risk that long-term equity investors face is permanent capital loss. Because price volatility and permanent capital loss are poorly correlated, models built on price data systematically mislabel safe businesses as risky and dangerous businesses as safe.

The paper documents the empirical failures of price-based models and demonstrates through eleven worked examples from Indian equity markets and a 227-company cross-market retrospective study across India, USA, China, and Japan that the G-spread correctly identifies the direction of long-run value creation and destruction in a way that no price-based model achieves. The EXCLUDED signal produced average realised returns of minus 12.9 percent per year across all four markets at a near-zero beat rate of 2 percent, confirming that the financial health gates identify genuine structural risk. The G-spread LOW RISK signal produced average excess returns of 10.8 percentage points above benchmark across all four markets at a 93 percent beat rate.