Friday, March 19, 2010

William Sharpe's IPO

William Sharpe's company "Financial Engines" has gone public. You'll recall that Bill Sharpe is the Nobel prize winning economist who developed the CAPM. Financial Engines is a company that provides asset allocation advice using portfolio optimization tools.

The basic concept of the company is really great. They apply hard core portfolio tools to optimize retirement portfolios of individuals. As they say on their website...
There's no such thing as a one-size-fits-all investment strategy. That's why Financial Engines gives you a personalized Retirement Plan designed to fit your situation. We analyze expense ratios, sales loads, asset turnovers, transaction costs, and management styles. To manage risk, we emphasize diversification—a technique that spreads risk over different investment types. We balance all these factors to create a personal investment strategy designed to maximize expected returns at a risk level appropriate for you.


From an academic point of view, it's always great to see what we teach in class being used in the real world.

Thursday, March 11, 2010

A new penny????

Apparently the U.S. Mint has come out with a new penny. Isn't it time we abandoned the penny?

Benefits of higher education...

A nice graphic showing the benefits of higher education, although the income disparity between men and women is troubling.

Best jobs in America

Just in case you were trying to decide what to do with your life...here are the "best" jobs in America. Apparently the ranking takes account of all sorts of factors.

Fond memories - the end of the dot com bubble

It's the 10 year anniversary of the dot com bubble bursting. To put it in perspective, the NASDAQ is currently at 2356 while at the peak (10 years ago) it was at 5132. I'm betting that it will take more than 10 years to get back to that level.

Monday, March 8, 2010

Inflation Illusion

People don't get inflation. Case in point - another blogger cites a recent communication from the AARP (the American Association for Retired Persons). Apparently, this year because inflation was zero, there will be no cost of living increase in Social Security. The AARP is very upset about this...

We’re already months into 2010, and seniors still haven’t seen any relief because of the lack of a cost-of-living adjustment to their Social Security. For the first time in 35 years, the regular payment update they’ve depended on did not occur.

Congress must act quickly. Will you help us flood their offices with letters, demanding that lawmakers make relief a priority?
.

Presumably, they'd be happier if we had high inflation and they got a larger cost of living increase.

Thursday, March 4, 2010

What's really wrong with Business Schools.

This is a bit old, but it recently came to my attention again and I thought that I would post it for those who haven't seen it.

A few years back, the paper "How Business Schools Lost Their Way" caused a bit of a stir by basically saying that B schools fail because they are too focussed on teaching theory and quant methods and don't teach enough practical stuff. Their summary was
Too focused on “scientific” research, Business schools are hiring professors with limited real-world experience and graduating students who are ill equipped to wrangle with complex, unquantifiable issues—in other words, the stuff of management.

I pretty much completely disagree with their article. Most students in our MBA program have real world experience. Every day they are solving "real business problems" - they don't come to school to solve more "real world problems". The value added of a business education is the analytical tools and methods that will help them understand and solve these types of problems in the future. This means that we have to teach theory. We have to teach quant methods.

As a professor, my job is to create and disseminate knowledge. Most of the stuff I teach is the result of the research of previous finance and economics researchers. You can't teach finance using anecdotes and cute war stories from the real world - although such things can provide nice little breaks in a 3 hour lecture on portfolio theory!

A very well written, and I think entirely on the mark rebuttal to the Bennis and O'Toole paper is by DeAngelo, DeAngelo and Zimmerman. These authors argue that more rigorous training is what is needed in B'schools and furthermore, that counter to the argument by Bennis and O'Toole, "Research competence does not imply teaching incompetence".

Gene Fama "My Life in Finance"

Eugene Fama is widely credited for developing the theory of efficient markets. As far as finance goes, he is one of the preeminent researchers in the field, ever. It is really hard to begin to quantify his contributions. In my own personal work, I am sure that I cite Fama's work more than that of any other single researcher. (Most of Fama's work is coauthored with Ken French).

Fama's papers are interesting, clearly articulated and well written. He tackles complex problems in the most straightforward way.

Fama has published (on his blog and in a journal) a sort of autobiography titled "My life in finance". It details his major research ideas and is really essential reading for any serious student of finance.

Monday, March 1, 2010

Day trading

Day trading is the practice of buying and selling stocks (usually) all within the same trading day. In theory, day traders should not hold stocks over night. The problem with day trading is the transaction costs. Constant buying and selling will eat your returns, and even with low commissions, the bid-ask spread will still erode your wealth.

That said, I have to say I was impressed by this one day trader's set up. I only hope he makes enough to cover his light bill.