Initial public offerings (IPOs) involve a great deal of uncertainty, which makes them a relatively risky investment. Thus, investors should receive higher expected returns as compensation for the greater amount of risk that’s associated with them. However, the evidence shows that unless you are well-connected enough to receive an allocation at the IPO price (and …Read More.
For about three decades, the working asset pricing model was the capital asset pricing model (CAPM), with beta—specifically market beta—being its sole factor. Then, in 1993, the Fama-French three-factor model—which added size and value—replaced the CAPM as the workhorse model. By eliminating two major anomalies (the outperformance of small stocks and of value stocks), it …Read More.
What do the following investments have in common? Options Covered calls Collateralized mortgage obligations Non-traded REITs Master limited partnerships Variable annuities Equity-indexed annuities Hedge funds Principal protected notes Private equity Here’s the answer: They are all complex investments. As a result, assessing the risks involved with owning these investments can be challenging. They also generate …Read More.
One of the interesting puzzles in finance is that stocks with greater idiosyncratic volatility (IVOL) have produced lower returns. This is an anomaly, because idiosyncratic volatility is viewed as a risk factor—greater volatility should be rewarded with higher, not lower, returns. Robert Stambaugh, Jianfeng Yu and Yu Yuan, authors of the study “Arbitrage Asymmetry and …Read More.
Haim Mozes and John Launny Steffens, authors of the study “Getting More Value Out of the Value Factor,” which was published in The Journal of Investing’s Winter 2015 issue, have attempted to create a model that can accurately predict the performance of the value premium. The factors in their model include analysts’ long-term earnings growth …Read More.
One of the questions I’m most often asked by reporters covering finance is: “What are the biggest risks facing investors?” My usual response is that the biggest risk confronting most investors is staring right back at them when they look in the mirror. And there’s plenty of academic research to support that view. Much of …Read More.
In life, there are certain nonnegotiables we simply must have. Think food, water and shelter for starters. Nobody will ask, “Is it worth it to eat?” It’s just something you do to stay alive. But deciding what to eat? That’s a different question. Will I eat the bologna or prosciutto? Drink tap water or bottled? …Read More.
The Shiller cyclically adjusted (for inflation) price-to-earnings ratio—referred to as the CAPE 10 because it averages the last 10 years’ earnings and adjusts them for inflation—is a metric used by many to determine whether the market is undervalued, fairly valued or overvalued. Employing a 10-year average for earnings, instead of the most current 12-month earnings, …Read More.
There are many anomalies in investing. It wasn’t easy to isolate the three biggest ones, but here are my choices: 1. You love Warren Buffett, but ignore his advice. Warren Buffett has rightfully been called “the greatest investor of his generation, or ever.” Given his cult-like status, you’d think investors would hang on his every …Read More.
You’ve heard of the American dream, right? The American dream was this machine we built to get rid of uncertainty and create security. It’s the white picket fence, the job and the minivan. You watch Dan Rather and a sitcom. You go to bed, go to sleep and repeat. It may not be that exciting, …Read More.
Over the past decade, investors have continued to pour new assets into hedge funds. Total hedge fund assets under management are now greater than $2.6 trillion, and the number of hedge funds continues to grow (current estimates put them in excess of 10,000, more than twice the number there were in 1990). Consider also that …Read More.
The data is irrefutable. There’s a direct correlation between low fees and higher expected returns. Two recent studies from Morningstar bring this point home in a powerful way. The significance of low fees Read the rest of the article at The Huffington Post. …Read More.
You’ve heard of the American dream, right? The American dream was this machine we built to get rid of uncertainty and create security. It’s the white picket fence, the job and the minivan. You watch Dan Rather and a sitcom. You go to bed, go to sleep and repeat. It may not be that exciting, …Read More.
Classical economic theory suggests that free markets, in which individuals each act according to their self-interest, yield the best of all possible worlds. All one has to do is look around at places like Cuba and North Korea to see the benefits this system has provided. But economists George Akerlof and Nobel Prize-winner Robert Shiller …Read More.
It’s logical to believe that corporate managers have a preference for issuing equity at times they perceive their firm’s stock price is overvalued or high relative to some benchmark (such as price-to-earnings ratio or book-to-market ratio). The academic research on the subject supports this hypothesis—seasoned equity offerings (SEOs) do tend to be preceded by unusually …Read More.
