One of the big problems for the first formal asset pricing model developed by financial economists, the CAPM, was that it predicts a positive relation between risk and return. But empirical studies have found the [...]
One of the most well known and most beloved forms of literature is the fairy tale. Although most fairy tales are not about fairies, they are fictitious and highly fanciful tales of legendary deeds and [...]
The variance risk premium (VRP) refers to the fact that, over time, the option-implied volatility has tended to exceed the realized volatility of the same underlying asset. This has created a profit opportunity for volatility [...]
Because equities are much riskier than high-quality bonds, the vast majority of the risk of a conventional 60 percent equity/40 percent bond portfolio is equity risk. Here’s the simple math demonstrating the point. Well-diversified equity [...]
In “Your Complete Guide to Factor-Based Investing,” Andy Berkin and I presented the evidence demonstrating that momentum, both cross-sectional (or relative) momentum and time-series (or absolute, trend following) momentum, not only increases the explanatory power [...]
According to Christian mythology, the Holy Grail was the dish, plate or cup with miraculous powers that were used by Jesus at the Last Supper. Legend has it that the Grail was sent to Great [...]
We can define popularity as the condition of being admired, sought after, well-known, and/or accepted. One would think popularity is a good thing. However, when it comes to investing, the research shows that along with [...]
Research demonstrates that the investment factor has explanatory power for the cross-section of stock returns, with high-investment firms tending to underperform low-investment firms. For example, Kewei Hou, Chen Xue and Lu Zhang, authors of the [...]
There’s a large body of research, including the 2017 study “Tail Risk Mitigation with Managed Volatility Strategies” by Anna Dreyer and Stefan Hubrich, that demonstrates that, while past returns do not predict future returns, past [...]
Two of the more interesting puzzles in finance are related to volatility—stocks with greater idiosyncratic volatility (IVOL) have produced lower returns and stocks with high uncertainty about risk, as measured by the volatility of expected [...]
The financial equivalent of the famous Miller Lite, “tastes great, less filling” debate is the debate between traditional financial economics which uses risk theories to explain asset pricing and the newer behavioral finance field that [...]
In 1921, University of Chicago Professor Frank Knight wrote the classic book “Risk, Uncertainty, and Profit.” An article from the Library of Economics and Liberty described Knight’s definitions of risk and uncertainty as follows: Risk [...]
Since the development of the capital asset pricing model (CAPM) in the 1960s, hundreds of anomalies (what John Cochrane famously called a “zoo of new factors”) have been uncovered in the cross-section of stock returns. [...]
As the chief research officer for Buckingham Strategic Wealth and The BAM Alliance, I’m often asked, after any asset class or factor experiences a period of poor performance, if the historical outperformance of stocks with [...]
In a recent ETF column, Allan Roth listed five investment lessons. While I agreed with much of what he wrote, one claim—factor investing has “failed miserably”— called for examination of the facts. But first, a [...]
A good friend, Sherman Doll, related the following story. Sherman has been a two-line sport kite flier for years. While not a pro, he has learned a few tricks from observing the flying behavior of [...]
Each time S&P Dow Jones Indices publishes its latest Active Versus Passive Scorecard, the persistent failure of the vast majority of actively managed funds to outperform is highlighted. The evidence on this failure led Charles [...]
The CAPM was the first formal asset-pricing model. Market beta was its sole factor. With the 1992 publication of their paper, “The Cross-Section of Expected Stock Returns,” Eugene Fama and Kenneth French introduced a new-and-improved [...]
The 2014 study by Andrea Frazzini and Lasse Heje Pedersen, “Betting Against Beta,” found strong support for low-beta strategies. I’ve previously written on low-beta strategies here. This paper finds that, for U.S. stocks, the betting [...]
The carry factor is the tendency for higher-yielding assets to provide higher returns than lower-yielding assets — it is a cousin to the value factor, which is the tendency for relatively cheap assets to outperform [...]
