Do active managers earn their fees?

From Gene Fama...the answer, as readers of my blog well know, is no they do not.

Gene Fama talks about efficient markets

Great short interview with the so-called "father of modern finance".



Quote: Active management is a negative sum game.

Are stock returns normally distributed?

Not entirely - they tend to have fatter tails.

Seeking the inefficient asset class.

Great post on the Fama French forum and a must read for my current MBA students.  The article discusses the extent to which some markets may or may not be as efficient in terms of pricing as other markets.

Gene Fama on volatility

Gene Fama, Chicago Professor and the father of the efficient markets theory,  talks about recent volatility to a group of students.  Well worth reading.

How to use the FF 3 factor model

Via the financeprofessor blog - how to implement the Fama French 3 factor pricing model.

Socially responsible investing

Fama and French opine on socially responsible investing.

My view has always been invest to maximize your risk return trade off and then give generously to well run charities.

Ken French talks about homemade dividends

Ken French explains the concept of homemade dividends.  The basic idea is that you should be indifferent (all else equal) between owning a stock with a 5% dividend yield and a stock with a 0% yield where you sell 5% of your holdings annually.

This is actually a very important concept, and one not well understood by many stockholders.  Case in point;  the recent concerns of some local shareholders of Progress Energy who have expressed concern about the dividend yield on Progress stock declining after its merger with Duke Energy.

Side note: any students who have taken MBA 521 know this well.

Does beta predict returns?

Fama and French answer the age old question: do high beta stocks outperform low beta stocks?   Their answer is yes, but not by as much as they should.

What is the optimal global weighting system?

Portfolio theory states that if we believe market prices are correct, then the optimal weighting system for a portfolio should be based on market values.   Fama and French tackle the question of what happens when you factor in local market distortions that may provide a home market bias.

The answer is messy.  But at the end of the day, diversification is what counts.

Fama talking about efficient markets and the impact of regulation

http://www.bloomberg.com/video/64476076/ Fama thinks that capital requirements aren't high enough for big banks.  He's absolutely correct of course.

What role commodities?

Ken French talks about the role of commodities in a portfolio.  He makes a brilliant but sometimes overlooked point:

The claims that, going forward, commodity funds (i) will have the same Sharpe ratio as the stock market, (ii) will be negatively correlated with the returns on stocks and bonds, and (iii) will be a good hedge against inflation can't all be true. Who would want the other side of this trade? 

An ancient tale with no empirical support.

Fama and French answer the question:

"Some researchers argue that a market timing strategy based on buy/sell signals generated by a 50- or 200-day moving average offers a more appealing combination of risk and return than a buy-and-hold approach. What is your view?"

What should investors do now?

Reader Mike sent me the following link to a really fantastic series of presentations on the Dimensional Fund Advisors (DFA) website.  These presentations explore the role of the media in investing, and the implications of efficient markets on investment decisions.  They also look at the effect of recessions on stock prices.  All highly recommended.

DFA is an investment company that bases its recommendations heavily on the findings of academic finance.   Frequent readers will note that I often post stuff from the Fama-French blog.  The Fama French blog is housed on the DFA website as Fama and French are both board members of DFA.

There's also a bunch of other good stuff on the DFA website.  I'll probably post bits here and there.

HT: Mike McCartney

Is this a "stock picker's market"?

Of course it isn't. It never is, but TV pundits, analysts and other "experts" are apparently saying it is. Let's let Fama and French dispatch this one with their usual brevity.

Flash Crash

Fama and French opine on whether high frequency trading caused the flash crash of May 6, 2010.

Can options reduce risk?

Answer is of course. Fama and French discuss

Fama on regulation and the financial markets

Gene Fama - the person credited for developing the efficient markets theory - talks about whether or not markets are still efficient and whether the efficient markets theory still works.

His main points:
1. Of course markets are still efficient.
2. Even professionals cannot time the market. (In other words - buy index funds)
3. Although he prefers less regulation, the concept of banks being too big to fail is a problem. TBTF occurs because the government cannot let a huge bank fail because of the risk to the financial system. In essence the government unwillingly gives a guarantee to the bank. His solution, which is one I have also mentioned before, is to increase capital requirements. He wants huge capital requirements - 40% or more. In this case government regulation is needed to combat this TBTF problem.

Gold in a portfolio

A common question I get asked is "shouldn't investors buy gold because it is a hedge against inflation". Fama and French provide an excellent answer to this question. Bottom line is, if you are not wearing it then you won't get a fair return.

Semi variance

Fama & French discuss the use of semi variance as a measure of risk.