Mark Coppejans and Ananth Madhavan This paper examines the impact of transaction costs on portfolio performance. Previous research on this topic has focused largely on post-trade considerations, that is, the impact of realized transaction costs on investment performance. By contrast, we focus on pre-trade considerations, namely the impact of transaction costs on portfolio breadth, turnover… Read more
Articles
WHAT EVERY INVESTOR SHOULD KNOW ABOUT COMMODITIES PART I: UNIVARIATE RETURN ANALYSIS
Harry M. Kat and Roel C. A. Oomen In this paper, we study the univariate return properties of a large variety of commodity futures. Our analysis shows that the volatility of commodity futures is comparable to that of US large cap stocks. Yet, with the exception of energy, a consistently positive risk premium is lacking… Read more
MEASURING THE TRUE COST OF ACTIVE MANAGEMENT BY MUTUAL FUNDS
Ross M. Miller This article derives a rigorous method for allocating fund expenses between active and passive management that enables one to compute the implicit cost of active management. Computing this active expense ratio requires only a fund’s published expense ratio, its R2 relative to a benchmark index, and the expense ratio for a competitive… Read more
INDUSTRY CONCENTRATION AND MUTUAL FUND PERFORMANCE
Marcin Kacperczyk, Clemens Sialm and Lu Zheng We study the relation between the industry concentration and the performance of actively managed U.S. mutual funds from 1984 to 2003. Our results indicate that the most concentrated funds perform better after controlling for risk and style differences using factor-based performance measures. This finding suggests that investment ability… Read more
CAP WEIGHTED PORTFOLIOS ARE SUB-OPTIMAL PORTFOLIOS
Jason Hsu In this paper, we show that under a fairly innocuous assumption on price inefficiency, market capitalization weighted portfolios are sub-optimal. If market prices are more volatile than is warranted by changes in firm fundamentals, then cap-weighted portfolios do not capture the full premium commensurate their risk. The sub-optimality arises because cap-weighting tends to… Read more
Bruno de Finetti THE PROBLEM OF “FULL-RISK INSURANCES”
Luca Barone We examine—in its different aspects—the problem of the risk due to hedging a set of insurances and, consequently, the problem of the retention levels, i.e., of the most efficient method to reinsure a part of such insurances to reduce the risk within the desired limits, while minimizing the loss of profit. The different… Read more
DE FINETTI SCOOPS MARKOWITZ
Harry M. Markowitz In 1940, in the context of choosing optimum reinsurance levels, Bruno de Finetti essentially proposed mean-variance analysis with correlated risks. It was not until 1952 that Markowitz and Roy introduced mean-variance analysis with correlated risks into the financial literature. De Finetti solved the problem of computing mean-variance efficient frontiers for a particular… Read more
STOCK RETURN MOMENTUM AND INVESTOR FUND CHOICES
Travis Sapp and Ashish Tiwari Recent research by Gruber (1996) and Zheng (1999) has shown that investors are able to predict mutual fund performance and invest accordingly. This phenomenon has been dubbed the “smart money” effect. We show that the smart money effect is explained by stock return momentum at the one year horizon. Further… Read more
THE FUNDAMENTAL LAW OF ACTIVE PORTFOLIO MANAGEMENT
Roger Clarke, Harindra de Silva and Steven Thorley The strategic perspectives and terminology of the fundamental law is a common framework in the practice of active portfolio management. For tractability, fundamental law theory depends on the simplifying assumption of a diagonal covariance matrix of security returns, though the matrices supplied to numerical optimizers are fully… Read more
ON THE FINANCIAL INTERPRETATION OF RISK CONTRIBUTION: RISK BUDGETS DO ADD UP
Edward Qian Due to a lack of clear financial interpretation, there are lingering questions in the financial industry regarding the concepts of risk contribution. This paper provides as well as analyzes risk contribution’s financial interpretation that is based on expected contribution to potential losses of a portfolio. We show risk contribution, defined through either standard… Read more