Volume 17, No. 2, 2019 Edmund Bellord, Joshua Livnat, Dan Porter and Martin B. Tarlie The growing dominance of the core and explore model — a large passive index combined with a collection of high tracking error satellite portfolios — in conjunction with the growth of factor investing has renewed interest in how to allocate… Read More
Articles
Automated Financial Management: Diversification and Account Size Flexibility
Volume 17, No. 2, 2019 Michael Reher and Celine Sun We study the value added of automated financial management (AFM) services along two dimensions: diversification and account size exibility. First, using a company-specific experiment with matched AFM and traditional portfolios, we find that AFM portfolios are significantly better diversified. Underdiversified investors are more likely to… Read More
A Model of Bond Value: Explaining Yields with Growth and Inflation
Volume 17, No. 2, 2019 Thomas Shevlin This paper looks to establish a new heuristic for investors, giving them a simple, intuitive way to relate bond yields to prevailing trends in growth and inflation. The model offers an alternative to forecasting surveys, which have been over-estimating 10-year Treasury yields for decades and continue to project… Read More
Quantifying the Skewness Loss of Diversification
Volume 17, No. 2, 2019 James X. Xiong and Thomas M. Idzorek Diversification is widely viewed as the “only free lunch” of finance. Unbeknownst to the free lunch crowd, skewness is typically positive for individual stocks and negative for diversified portfolios and thus diversification is not free. This undesirable move from positive to negative skewness… Read More
A Portfolio Approach to Accelerate Therapeutic Innovation in Ovarian Cancer
Volume 17, No. 2, 2019 Shomesh Chaudhuri, Katherine Cheng, Andrew W. Lo, Shirley Pepke, Sergio Rinaudo, Lynda Roman and Ryan Spencer We consider a portfolio-based approach to financing ovarian cancer therapeutics in which multiple candidates are funded within a single structure. Twenty-five potential early-stage drug development projects were identified for inclusion in a hypothetical portfolio… Read More
Portfolio Optimization with Noisy Covariance Matrices
Vol 17, No. 1, 2019 Jose Menchero and Lei Ji Mean-variance optimization provides a framework for constructing portfolios that have minimum risk for a given level of expected return. The required inputs are the expected asset returns, the asset covariance matrix, and a set of investment constraints. While portfolio optimization always leads to an increase… Read More
Letter from the Editor
Letter from the Editor John (Jack) Bogle, Sr passed away on January 16, 2018. View PDF… Read More
Lessons Learned From Student Managed Portfolios
Vol. 17 No.1, 2019 Stephan Kranner , Neal Stoughton, and Josef Zechner We study asset management decisions of three competing student managed funds in Vienna, Austria for a ten-year period. This real-world experience allows us to precisely test the tournament effect of fund management, the disposition effect, and managerial team size. We find support for… Read More
Explaining Buyout Industry Returns: New Evidence
Vol. 17 No.1, 2019 David Turkington Traditional equity factors such as the leveraged equity risk premium, the small-cap premium, and the value premium have had high historical returns on average, as has the buyout fund industry in aggregate. Previous research has argued that these factors explain the excess performance of private equity over public equity… Read More
Does Extreme Correlation Matter in Global Equity Asset Allocation?
Vol. 17 No.1, 2019 Bruno Solnik and Thaisiri Watewai Global asset allocation provides risk diversification. But international market correlation increases sharply during global crises and diversification benefit disappears when it is most needed. We model these correlation breaks and derive the asset allocation implications. The model can quickly detect crises and suggests adapting allocation for… Read More