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Are You Too Conservative With Your Investments

Date08 May 2014

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Investors’ behavior can be heavily influenced by their experiences. For example, the financial crash of 1929 and the ensuing Great Depression permanently shattered many investors’ belief in buying stocks. A whole cohort of potential investors stayed away from equities for a very long time, if not permanently. Similarly, the “lost decade” of 2000-2009, when the...

What Exactly Is Risk?

Date08 May 2014

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This is the first of a two part series that aims to define risk. Since we live in a world without crystal balls that allow us to clearly see the future, prudent investing is all about the management of risk and expected returns. A problem that both investors and investment advisors face is defining what exactly risk...

What Exactly Is Risk: Part II

Date08 May 2014

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Today concludes our two-part feature that aims to define risk. Not being able to do so is a problem for both advisors and investors. Alternative Definition of Risk Risk can also be defined as the probability of not achieving your financial objective – with the objective generally being not the accumulation of the greatest wealth, but instead,...

The Efficient Market Hypothesis, Fact Or Fiction? Part 3

Date08 May 2014

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Part one of our series introduced the efficient market hypothesis. Part twoexplored evidence in the mutual fund and pension plan worlds that showed that while the EMH fails all the tests of efficiency, it passes the only test that really matters – are active investors likely to outperform appropriate benchmarks after the expenses of the effort? Today,...

The Efficient Market Hypothesis, Fact Or Fiction? Part 2

Date08 May 2014

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Yesterday, we discussed the history and overview of the efficient market hypothesis. Today we’ll look at some of the evidence on the efforts of mutual funds and pension plans to generate alpha. Mutual Funds Each year, Standard & Poor’s publishes its Indices Versus Active Funds Scorecard, more commonly referred to as SPIVA, presenting the evidence on the...

The Efficient Market Hypothesis, Fact Or Fiction? Part 1

Date08 May 2014

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Today begins a four-part series on the efficient market hypothesis. We’ll begin with a brief history and explanation of the EMH. Eugene Fama, recent recipient of the Nobel Prize in economics, is considered the father of the efficient-market hypothesis (EMH). The EMH asserts that financial markets are “informationally efficient.” As a consequence, we would expect...

Fixed Income’s Low-Risk Anomaly

Date08 May 2014

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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 low-volatility anomaly (low-volatility stocks have outperformed high-volatility stocks) and the poor performance of extreme small...

More On Value Premium And Risk

Date08 May 2014

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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 lens of risk, and today we turn to a fourth paper: The 2005 study “Understanding...

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