Academic Finance Research and Insights

Options 101: Understanding Options Basics

By |March 27th, 2024|Options|

Options have a bad reputation, and for good reason. After all, our friends at Wall Street Bets have taken over and turned the options market into a casino. But just like options can be used for gambling, they can also be used to structure risk and formulate payoffs that have the potential to reduce risk at the portfolio level. In fact, options are one of the best tools at our disposal to manage portfolio risk, if used correctly.

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Personality Differences and Investment Decision-Making

By |March 25th, 2024|Research Insights, Basilico and Johnsen, Academic Research Insight, Other Insights, Behavioral Finance|

This study offers valuable information to provide insights into the underlying mechanisms driving investment behavior. For example, recognizing the impact of Neuroticism on belief formation and risk perception can help explain why some investors exhibit greater aversion to stock market volatility. Similarly, understanding how Openness influences risk preferences can shed light on why certain individuals are more willing to take investment risks than others.

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Tracking Error is a Feature, Not a Bug

By |March 22nd, 2024|Empirical Methods, Research Insights, Larry Swedroe, Other Insights, Active and Passive Investing|

The benefits of diversification are well known. In fact, it’s been called the only free lunch in investing. Investors who seek to benefit from diversification of the sources of risk and return of their portfolios must accept that adding unique sources of risk means that their portfolio will inevitably experience what is called tracking error—a financial term used as a measure of the performance of a portfolio relative to the performance of a benchmark, such as the S&P 500.

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Breaking Bad Momentum Trends

By |March 15th, 2024|Research Insights, Factor Investing, Larry Swedroe, Other Insights, Momentum Investing Research|

In their two papers, Goulding, Harvey, and Mazzoleni showed that observed market corrections and rebounds carry predictive information about subsequent returns and showed how that information could be utilized to enhance the performance of trend-following strategies by dynamically blending slow and fast momentum strategies based on four-state cycle-conditional information.

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Exchange Funds 2.0: A Newly Accessible Way to Diversify Concentrated Positions

By |March 14th, 2024|Research Insights, Tax Efficient Investing|

When investors have a concentrated stock position that has performed well, they eventually face the same tough question: Should they continue to hold the position (and the outsized exposure it brings to their portfolio) or diversify – and face significant capital gains taxes?

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Betting on a Short Squeeze as Investment Strategy

By |March 8th, 2024|Skewness, Research Insights, Larry Swedroe, Factor Investing, Guest Posts, Other Insights, Tactical Asset Allocation Research|

Short squeezes are often associated with a large positive jump in the price of a stock. Filippou, Garcia-Ares, and Zapatero demonstrated that skewness-seeking investors try to identify securities that could experience a short squeeze in the near future and are willing to pay a premium for them. That results in an overvaluation of the options and, on average, negative returns. Investors are best served to avoid investments with lottery-like distributions. One way to do that is to turn a blind eye to social media sites like Robinhood and Reddit so you don’t get caught up in the hype and excitement. That’s another example of why retail investors are called “dumb money.” Forewarned is forearmed.

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