Q&A: Confidence in the Bell Curve
It would be very enlightening if you would comment on the Nassim Nicholas Taleb ("The Black Swan") attack on the use of Gaussian (normal bell curve) mathematics as the foundation of finance. As you may...
View ArticleQ&A: Thoughts on Mark-to-Market
What do you think of the mark to market issue? EFF: It gives investors a good estimate of what a financial institution is worth. It has more flexibility than commonly realized, especially for illiquid...
View ArticleQ&A: Inverted Yield Curves
I have a client who is convinced that an inverted yield curve is a signal to get out of equities. What are your thoughts on this topic? EFF/KRF: Inverted yield curves are often observed at the front...
View ArticleQ&A: When Market Timers Succeed
Recently, I've heard some say "I got out of the market in May 2008 and I am sure glad I did." Given the obviously positive results of this decision, what is the best argument to convince people that...
View ArticleQ&A: Challenging S&P 500 Earnings
Recently, Professor Jeremy Siegel has challenged the method of calculating earnings for the S&P 500. He believes the calculation should be market weighted, as is the index. Standards and Poor's...
View ArticleQ&A: Foregoing Future Expected Returns?
A recent change to a client's life needs would normally warrant a reduction in portfolio risk. In doing so immediately, he would forego future expected returns that he paid so dearly for in the last...
View ArticleQ&A: An Optimal Allocation?
I represent an endowment of about $30 million. In public equities we have most of our investments in market-wide mutual funds. What mix would you recommend between domestic, international and emerging...
View ArticleQ&A: How True is "Too Big to Fail?"
Is there such a thing as systemic risk in the financial system? Are some of our banking institutions truly "too big to fail?" EFF: The term "systemic risk" is less than 20 years old. It has become a...
View ArticleQ&A: Signs of a Recovery?
I read an article recently profiling five signs that the recession is ending. What signs might you look at to indicate when the recession is ending? EFF/KRF: We are not experts, but know enough about...
View ArticleQ&A: Bias in the EMH?
George Soros claims (in his op-ed in the Wall Street Journal) that the Efficient Market Hypothesis is invalid, because prices in financial markets "always provide a biased view of the future, and that...
View ArticleQ&A: Equity Premium Puzzle
Has the equity premium puzzle gone away? EFF: There never was one. The "puzzle" comes out of a simplified economic model that says the average spread of the equity market return over the t-bill...
View ArticleQ&A: Costs of Corporate Acquisition
Firms often pay a substantial premium to the market price when making acquisitions. Does their willingness to pay a premium suggest the shares of target firms were mispriced? EFF: The empirical...
View ArticleQ&A: Narrowly Held Risks
John Cochrane* has suggested that the historical premiums for small cap and value stocks reflect "narrowly held risks" and that these premiums are likely to shrink in the future "until the markets have...
View ArticleQ&A: Do Index Funds Contribute to Mispricing?
Index funds buy stocks "blind" without regard to company fundamentals. Do their activities contribute to mispricing of securities? EFF: Index funds typically buy cap-weighted portfolios so they do not...
View ArticleQ&A: The Equity Premium over Long Periods
A buy-and-hold for stocks appears to work well for long periods (such as 1975 - 1999) but then does poorly for extended periods as well, such as the most recent ten years. Isn't it clear that there are...
View ArticleQ&A: Hedge Funds and Securities Prices
Stock market analysts often claim that hedge funds represent a significant percentage of trading volume in securities markets. What effect, if any, do hedge funds have on stock and bond prices?...
View ArticleQ&A: Protecting Purchasing Power
U.S. budget deficits keep expanding and some of our largest trading partners have begun to question the dollar's role as the world's reserve currency. Both trends suggest a dim future for the...
View ArticleQ&A: Bonds for the Long Run?
Long-term government bonds outperformed the S&P 500 Index by 0.12% per year for the forty-year period ending March 2009. Does a negative risk premium for stocks vs. bonds over such a long period...
View ArticleQ&A: Is There a "New Normal"?
We often hear that the investment world must adjust to a "new normal", reflecting a permanent shift to greater market volatility worldwide. How should investors revise their portfolios in response to...
View ArticleQ&A: Does Gold Belong in My Portfolio?
Based on spot price data from January 1970 through February 2010, the average return on gold bullion was almost exactly the same as the S&P 500 at 88 basis points per month. Volatility was...
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