Sharon Hill and Chris Gowlland Volume 10, Number 1, First Quarter 2012 Modern portfolio theory suggests that investors can achieve maximum diversification holding a portfolio of risky assets reflecting the entire market, but no generally accepted method exists to construct such a portfolio. We present data on global equities and global fixed-income securities since 1990… Read more
Articles
Timing the Value Style Index in a Markov Regime-Switching Model
Hany Guirguis, Ted Theodore and Michael Suen Volume 10, Number 1, First Quarter 2012 We construct and test a popular indicator for timing value style investment: the earnings yield dispersion (EYD). Conventional wisdom holds that one should invest in value style when there is a wide dispersion in earnings yield (E/P ratios) across the equity… Read more
Lifecycle Consumption-Investment Policies and Pension Plans: A Dynamic Analysis
Zvi Bodie, Jérôme Detemple and Marcel Rindisbacher Volume 10, Number 1, First Quarter 2012 This paper explores the optimal design of personal pensions based on the economic theory of the life cycle. It assumes that individuals derive utility from consumption of goods and leisure and that at some date they retire and stop earning income… Read more
Efficient Indexation: An Alternative to Cap-Weighted Indices
Noël Amenc, Felix Goltz, Lionel Martellini and Patrice Retkowsky Volume 9, Number 4, Fourth Quarter 2011 This paper introduces a novel method for the construction of equity indices that, unlike their cap-weighted counterparts, offer an efficient risk/return trade-off. The index construction method goes back to the roots of modern portfolio theory and focuses on the… Read more
Managing the Volatility of Alpha Models
Tony Elavia and Migene Kim Volume 9, Number 4, Fourth Quarter 2011 After posting good performance for over two decades, quantitative equity investment managers have recently produced weak returns. We develop a measure of risk and show how changes in risk provide a common framework to explain factor returns and past underperformance. We find that… Read more
Pairs – Trading on Divergent Analyst Recommendations
Susana Yu Volume 9, Number 4, Fourth Quarter 2011 Pairs-trading is a short-term, self-financing arbitrage strategy in which buy and sell positions are simultaneously placed on two stocks whose prices have moved temporarily apart after following a long parallel path. We develop a new pairs-trading rule based on financial analysts’ buy/hold/sell recommendations from IBES Details… Read more
Another Look at Idiosyncratic Volatility and Expected Returns
Wei Huang, Qianqiu Liu, S. Ghon Rhee and Liang Zhang Volume 9, Number 4, Fourth Quarter 2011 We conduct comprehensive analyses of the return characteristics of stock portfolios sorted by idiosyncratic volatility. We show that the relationship between idiosyncratic volatility and expected stock returns depends on whether the portfolio is composed of stocks with extreme… Read more
Fat Tails and Stop-Losses in Portable Alpha
Mark B. Wise, Yonathan Schwarzkopf and Vineer Bhansali Volume 9, Number 3, Third Quarter 2011 We investigate the optimal stop-loss on the alpha investment for a portable alpha vehicle. The optimal stop-loss maximizes investors utility of wealth for a portfolio consisting of a portable alpha fund and risk free assets. We model the dynamics of… Read more
Hedge Funds: A Sensible Approach to Oversight
Antony E. Ghee Volume 9, Number 3, Third Quarter 2011 After years of debating whether additional regulation should be imposed on hedge funds, legislative initiatives, such as the Dodd-Frank Act, have recently been enacted and could significantly alter the scope of government oversight in an industry that has, until recently, been subject to little regulatory… Read more
Portfolio Diversification
James A. Bennett and Richard W. Sias Volume 9, Number 3, Third Quarter 2011 Contrary to conventional wisdom, there is no evidence investors can, or have ever been able to, easily form portfolios containing negligible exposure to unsystematic returns. Because well-diversified portfolios are the bedrock upon which so much financial theory is built, investors’ inability… Read more