By Charles Rotblut, CFA
Six months ago, Charley Ellis discussed in these pages how improvements in computer power, greater interest in MBA programs and much higher compensation has increased competition within the investment industry (“Competition Has Made Indexing a Winner’s Game,” November 2016 AAII Journal). One way these trends have manifested themselves is in the search for anomalies. Anomalies are factors influencing a security’s returns unexplained by the capital asset pricing model. (The CAPM calculates returns as the volatility-adjusted premium over a risk-free asset.)
Research efforts into ways to earn a premium return have likely occurred since financial markets first existed. If there is a chance to make money, someone is going to work on a way to make more of it.
In the field of investing, we’re seeing this innovation partially play out in research on anomalies (aka factors). It’s being pitched under the snazzier term of “smart beta.” Some of the research is straightforward; some of it is more esoteric. So much research in the subject has been done that former American Finance Association president John Cochrane once wrote, “Now, we have a zoo of new factors” (The Journal of Finance, July 19, 2011).
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Tilting a portfolio to a small number of factors, including value and size, can increase returns while at the same time reducing risk.
April FEATURED ARTICLES
By James B. Cloonan
Major revisions to financial statements have been rare among Shadow Stocks; their mere occurrence is not reason alone for a stock’s removal.
By Charles Rotblut, CFA
Small-cap stocks have historically realized higher returns than large-cap stocks, but this outperformance does not occur every year.
By Meir Statman
Changing the context in which data is viewed and using good mental shortcuts can help lead to better decisions.
By Hildy Richelson and Stan Richelson
Closed-end bonds may look attractive based on their yields and discounts to net asset value, but there are pitfalls to watch out for.
By John Bajkowski
The 20 stocks with the least aggressive accounting, as defined by how much cash flow exceeds net income relative to average total assets.
By Jeffrey Weiss
Trendlines can offer insights even though they have an artistic element to them. Using bar and line charts can help in their analysis.
By Craig Israelsen
A diversified portfolio not only increases return relative to risk, it can also boost the amount of income provided by RMDs.
Current news items of interest to individual investors.
Members pose questions about leveraged and inverse funds and model ETF portfolios, and make suggestions on rebalancing scenarios and inherited IRAs.