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Editor's Note

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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April 2017 Issue »

COVER ARTICLE


Factors Allow Investors to Think Differently About Diversification

By Larry Swedroe

Tilting a portfolio to a small number of factors, including value and size, can increase returns while at the same time reducing risk.




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