Q&A: Book Value
What is the validity of book value in today's environment, especially as it applies to financial firms? EFF/KRF: There is always an issue about how to "properly" measure value. But all the work we have...
View ArticleQ&A: Defined Benefit Dilemma
What suggestions do you have for defined benefit plans as equities have lost 40% to 60% of value, year-to-date, with interest rates at historical lows, and liabilities that are growing. EFF/KRF: Sorry,...
View ArticleQ&A: Prediction in Valuations?
Do valuation measures such as price/earnings or price/dividend ratios help predict future returns? Are they telling us anything now? EFF/KRF: Yes, but not with lots of confidence. The market return...
View ArticleQ&A: Three-Factor Model and Recent Returns
How well has the three-factor model explained the recent behavior of stock returns?  EFF/KRF: For diversified portfolios, quite well. For example, the model's market, size, and value-growth factor...
View ArticleQ&A: Recent Deleveraging
Do you think that the current investor deleveraging is playing a significant role in asset pricing? If so, has it been consistent with your views on asset pricing? Is this something we should be really...
View ArticleQ&A: Gold as a Haven?
Should I consider gold as a possible safe haven for some portion of my portfolio? EFF/KRF: The volatility of gold prices (and of commodity prices in general) is much like that of stock returns. Gold is...
View ArticleQ&A: Timing Volatility
Stock market volatility is currently quite high. Does it make sense for investors to get out of the market until volatility settles down? EFF: If the current high volatility makes you permanently...
View ArticleQ&A: T-bills Shift
What would happen if many investors decided to sell their stocks and invest in Treasury bills instead? EFF/KRF: Stock prices would go down and T-bill prices would go up - the usual response of prices...
View ArticleQ&A: The Value of Historical Data
How useful is an approach based on historical data when the current situation appears to be unprecedented? EFF/KRF: Any current situation is always somewhat unprecedented and somewhat old stuff. Large...
View ArticleQ&A: Market Turmoil
Is the market turmoil a sign that markets are not efficient? EFF/KRF: The market turmoil is caused by some combination of (i) quickly fluctuating changes in expected cashflows (future profitability),...
View ArticleQ&A: Regulation
Some people have argued that the turmoil was caused by a lack of government regulation. What do you think? Do we need more regulation? KRF: It is not obvious that financial regulations were weakened...
View ArticleQ&A: Recessions
The US economy is in a recession. Does it make sense to own stocks during a recession? EFF/KRF: There is no evidence that market timing in response to economic events enhances expected returns. The...
View ArticleQ&A: Global Correlations
Have global correlations gone, effectively, to 1? Have cross-country and cross asset-class correlations behaved any differently this time than in previous downturns? EFF/KRF: When market volatility...
View ArticleQ&A: Equilibrium During a Downturn?
The Dow peaked around 14K in October 2007, one year later the Dow went to 7500. Was the market really in equilibrium last October given that it was on the verge of such a steep collapse? How can one...
View ArticleQ&A: Factor Correlations
Are the Fama/French factors more correlated when markets go down? Are value portfolios riskier in bad times? EFF/KRF: The two questions are related. Throughout the period from 1926 to now, small stocks...
View ArticleQ&A: Bankrupt Firms: Who's Buying?
Why do shares of widely held bankrupt firms such as GM often trade well above zero even though the interests of common stock holders appear almost certain to be eliminated in reorganization? Is this...
View ArticleQ&A: Does Gold Belong in My Portfolio?
Based on spot price data from January 1970 through February 2010, the average return on gold bullion was almost exactly the same as the S&P 500 at 88 basis points per month. Volatility was...
View ArticleQ&A: Semi-Variance: A Better Risk Measure?
Is semi-variance a more useful measure of downside risk than standard deviation? My clients aren't worried about market surges, they're worried about market crashes. (Read the full entry)
View ArticleQ&A: Is Insider Trading Beneficial?
Some economists argue that prohibiting insider trading does more harm than good by reducing the flow of useful information. Do you agree? (Read the full entry)
View ArticleQ&A: Reducing Risk with Options
Can put or call options be used to achieve a more predictable risk-return tradeoff? For example, should I purchase put options to minimize equity portfolio losses? (Read the full entry)
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