Hard To Time Outperformance
The efficient market hypothesis asserts that financial markets are “informationally efficient”; that is, investors shouldn’t expect to consistently achieve returns in excess of average market returns on a risk-adjusted basis, given the information available at the time the investment is made. However, we know...
Accessing the Profitability Factor
A June 2012 study by Robert Novy-Marx, “The Other Side of Value: The Gross Profitability Premium,” provides investors with new insights into the cross section of stock returns. Among the important findings were: Profitability, as measured by gross profits-to-assets—gross profits...
Fixed Income’s Low-Risk Anomaly
Modern financial theory now includes the existence of many anomalies that shouldn’t exist if investors were perfectly rational and markets were perfectly efficient. Perhaps the most important anomaly is the persistent and pervasive momentum premium. Among the others are the...
More On Value Premium And Risk
Today concludes our two-part series on the research aimed to provide explanations for risk. We’ll pick up with more research on the topic. We looked at three different papers in Part I as we sought to assess the value premium through the...
Fixed Income’s Low-Risk Anomaly
Modern financial theory now includes the existence of many anomalies that shouldn’t exist if investors were perfectly rational and markets were perfectly efficient. Perhaps the most important anomaly is the persistent and pervasive momentum premium. Among the others are the...
More On Value Premium And Risk
Today concludes our two-part series on the research aimed to provide explanations for risk. We’ll pick up with more research on the topic. We looked at three different papers in Part I as we sought to assess the value premium through the...
Quality Factor Global in Scope
William Sharpe and John Lintner are typically given most of the credit for introducing the first formal asset pricing model, the capital asset pricing model (CAPM). CAPM provided the first precise definition of risk and how it drives expected returns....
Quality Works on EM Stocks Too
My last post showed that the quality (or profitability) premium provided valuable insights into not only U.S. stock returns, but international developed markets as well. Today I’ll look at the question of whether this quality factor applies to emerging markets. The simple...
A Closer Look at Value Premiums
Today’s post will begin a two-part series that explores the research examining risk-based explanations for the value premium, which, unlike the risk-based explanations of the size premium, have been a bit controversial. In June 1992, the paper “The Cross-Section of...
A Closer Look at CAPE Ratio
When estimating returns, we know that current valuations provide valuable information. The earnings yield derived from the Shiller CAPE 10—the cyclically adjusted price-to-earnings ratio—is considered by many to be at least as good, if not better, than other metrics. It...
