Vol. 19, No. 4, 2021 Yoram Kroll and Moshe Ben-Horin This paper presents a portfolio performance measure that accounts for the investment horizon assuming both risk and loss aversion as suggested by Tversky and Kahneman’s CPT framework. The optimal portfolio risk premiums of such investors decrease with the length of the investment horizon and our… Read more
Articles
A Market Signal-Based Alternative to Buy-and-Hold Investing
Vol. 19, No. 3, 2021 Atanu Saha and Yong Xu We propose a simple, hindsight-free, rule-based method of entry and exit into the stock market, with the goal of improving returns by averting large losses. Using data from 1928 through March 2020, we demonstrate that the proposed strategy delivers statistically significant outperformance over the S&P… Read more
Advances in Estimating Covariance Matrices
Vol. 19, No. 3, 2021 Jose Menchero and Lei Ji Correlation matrices are widely used in finance both for risk forecasting and for portfolio optimization. It is well known that the sample correlation matrix is unreliable for portfolio optimization. However, we show that for purposes of predicting portfolio risk, the sample correlation matrix is close… Read more
On the Use of the Daily Fama–French Risk-Free Rate
Vol. 19, No. 3, 2021 Joshua C. Fairbanks, Mark D. Griffiths and Drew B. Winters The Fama and French (1992) risk-free rate is used throughout the extant finance literature. The daily risk-free series has issues that raise concerns about its use as a benchmark. We detail the issues and discuss viable low-cost alternatives. We suggest… Read more
Long-Run Implied Market Fundamentals: An Exploration
Vol. 19, No. 3, 2021 Heinz Zimmermann The paper studies the volatility and correlation pattern of the fundamental valuation parameters (growth rate and its determinants, discount rate) calculated from widely used valuation ratios using the Gordon formula, and compares the findings to well-known insights from the asset pricing literature. Our results reveal a substantially different… Read more
A New Index of the Business Cycle
Vol. 19, No. 3, 2021 William Kinlaw, Mark Kritzman and David Turkington The authors introduce a new index of the business cycle that uses the Mahalanobis distance to measure the statistical similarity of current economic conditions with past episodes of recession and robust growth. Their approach has a key advantage compared to approaches that simply… Read more
The Magic Formula: Value, Profitability, and the Cross-Section of Global Stock Returns
Vol. 19, No. 2, 2021 Douglas W. Blackburn and Nusret Cakici Buying profitable, undervalued stocks and shorting unprofitable, overvalued stocks yields significant return differentials in North American, Europe, Japan, and Asia. Using data from 1991 to 2016, double sorting stocks into portfolios by gross profits, a measure of profitability, and earnings yield, a measure of… Read more
What Happens with More Funds than Stocks? Analysis of Crowding in Style Factors and Individual Equities
Vol. 19, No. 2, 2021 Ananth Madhavan, Aleksander Sobczyk and Andrew Ang The proliferation of funds juxtaposed against the decline in individual stock listing since the mid-1990s raises questions about crowding in individual stocks or style factors. We examine these issues by characterizing the common components of funds from 2007 through 2018. A key difference… Read more
Active Investing as a Negative Sum Game: A Critical Review
Vol. 19, No. 2, 2021 Geoffrey J. Warren The literature on whether active management adds value is examined through the prism of the proposition by Sharpe (1991) that active investing is a negative sum game after costs. Focal points include how active fund research does not directly test Sharpe’s proposition and seems inconsistent with it… Read more
Asset Pricing, Asset Allocation and Risk-Adjusted Performance with Multiple Goals and Agency: The Goals and Risk-Based Asset Pricing Model
Vol. 19, No. 2, 2021 Arun Muralidhar Investment managers require a consistent asset pricing model, asset allocation recommendations, and risk-adjusted performance measures (or the “three facets of investing”) to be effective in managing portfolios. Incorporating three critical realities of investing into these models (i.e., that investors have many stochastic goals, seek to delegate to skillful… Read more