February 23, 2012 - Strategic Allocation
How can an investor decide whether a new strategy or new asset class (more generally, a stream of returns), is better than those currently in a portfolio? In their February 2012 paper entitled “The Sharpe Ratio Indifference Curve”, David Bailey and Marcos Lopez de Prado introduce a process for assessing addition of a new strategy (return… Keep Reading
February 21, 2012 - Big Ideas, Strategic Allocation
Some experts use the mean-variance analysis of Modern Portfolio Theory (MPT), which penalizes large upside volatility, to measure portfolio efficiency. Others use Second-order Stochastic Dominance (SSD) analysis, purer mathematically than MPT but open to unrealistic investor behavior. Is there a better way? In the February 2012 version of his paper entitled “The Passive Stock Market Portfolio is Highly… Keep Reading
February 17, 2012 - Individual Investing, Sentiment Indicators
How overconfident are individual investors, and how does overconfidence affect their investing practices? In his November 2011 paper entitled “Financial Overconfidence Over Time | Foresight, Hindsight, and Insight of Investors”, Christoph Merkle examines relationships between the return/risk expectations of affluent, self-directed private investors and their trading activity, diversification and risk taking. To frame the relationships, he considers… Keep Reading
February 16, 2012 - Equity Options, Volatility Effects
Are option traders market leaders, such that information gleaned from options trading anticipates equity returns? In the December 2011 draft of their paper entitled “Exploiting Option Information in the Equity Market”, Guido Baltussen, Bart Van der Grient, Wilma De Groot, Weili Zhou and Erik Hennink examine whether information publicly available from the option market exploitably predicts… Keep Reading
February 14, 2012 - Equity Premium, Strategic Allocation
What is the best way to include the least developed (frontier) stock markets for portfolio diversification? In his December 2011 paper entitled “Frontier Markets: Punching Below their Weight? A Risk Parity Perspective on Asset Allocation”, Jorge Chan-Lau compares the diversification effects of frontier markets within a world equity portfolio based on risk parity and market capitalization… Keep Reading
February 13, 2012 - Momentum Investing
It is arguable that many stock momentum strategy tests derive more from logical/programming simplicity than common portfolio management practices. Does momentum work for portfolios of U.S. stocks when melded with the latter? In the January 2012 update of his paper entitled “Relative Strength and Portfolio Management”, John Lewis tests individual stock momentum in the context of real-world… Keep Reading
February 9, 2012 - Investing Expertise, Real Estate, Strategic Allocation
How do pension funds, arguably representative of sophisticated and conservative investors, use real estate as an alternative investment? In their January 2012 paper entitled “Value Added From Money Managers in Private Markets? An Examination of Pension Fund Investments in Real Estate”, Aleksandar Andonov, Piet Eichholtz and Nils Kok investigate the allocation, costs and performance of pension… Keep Reading
February 6, 2012 - Equity Options, Volatility Effects
Can investors usefully predict the short-term direction of the stock market by contrasting the outlooks implied by out-of-the-money (OTM) and at-the-money (ATM) market index options. In the October 2011 update of their paper entitled “Implied Volatility Spreads and Expected Market Returns”, Turan Bali, Ozgur Demirtas and Yigit Atilgan investigate the relationship between stock market index… Keep Reading
February 3, 2012 - Technical Trading, Volatility Effects
Does the effectiveness of simple moving average (SMA) crossing signals vary with stock volatility? In the August 2011 update of their paper entitled “A New Anomaly: The Cross-Sectional Profitability of Technical Analysis”, Yufeng Han, Ke Yang and Guofu Zhou investigate the application of SMAs to portfolios of stocks sorted based on realized volatility. Specifically, each… Keep Reading
February 2, 2012 - Bonds, Fundamental Valuation
Do aggregate corporate earnings predict bond market returns? In his January 2012 paper entitled “Aggregate Earnings and Corporate Bond Markets”, Xanthi Gkougkousi investigates the relationship between aggregate earnings and corporate bond market returns. Using quarterly aggregate earnings for a broad sample of U.S. stocks with fiscal years ending in March, June, September and December and total… Keep Reading