Q&A: Bailout Banks at All Costs?
Some think the exposures associated with credit derivatives are so extreme that the failure of one or two large financial institutions will ruin the nation. Could the useâor abuseâof credit default...
View ArticleQ&A: The First Global Recession?
Some have suggested this downturn is different because it is affecting the entire planet, not just a country or region, so previous downturns don't necessarily compare. Given the state of the world...
View ArticleQ&A: Diversification's Role Today
Is diversification working today, when we need it most? EFF/KRF: When overall market volatility increases, idiosyncratic (security-specific) volatility also tends to increase. For example, market...
View ArticleQ&A: Derivatives in an Efficient Market
What is the role of various derivatives instruments in maintaining an efficient market? EFF: Theoretically, derivatives increase the range of bets people can make, and this should help to wipe out...
View ArticleQ&A: Confidence in the Bell Curve
It would be very enlightening if you would comment on the Nassim Nicholas Taleb ("The Black Swan") attack on the use of Gaussian (normal bell curve) mathematics as the foundation of finance. As you may...
View ArticleQ&A: Thoughts on Mark-to-Market
What do you think of the mark to market issue? EFF: It gives investors a good estimate of what a financial institution is worth. It has more flexibility than commonly realized, especially for illiquid...
View ArticleQ&A: Inverted Yield Curves
I have a client who is convinced that an inverted yield curve is a signal to get out of equities. What are your thoughts on this topic? EFF/KRF: Inverted yield curves are often observed at the front...
View ArticleQ&A: When Market Timers Succeed
Recently, I've heard some say "I got out of the market in May 2008 and I am sure glad I did." Given the obviously positive results of this decision, what is the best argument to convince people that...
View ArticleQ&A: Challenging S&P 500 Earnings
Recently, Professor Jeremy Siegel has challenged the method of calculating earnings for the S&P 500. He believes the calculation should be market weighted, as is the index. Standards and Poor's...
View ArticleQ&A: Foregoing Future Expected Returns?
A recent change to a client's life needs would normally warrant a reduction in portfolio risk. In doing so immediately, he would forego future expected returns that he paid so dearly for in the last...
View ArticleQ&A: An Optimal Allocation?
I represent an endowment of about $30 million. In public equities we have most of our investments in market-wide mutual funds. What mix would you recommend between domestic, international and emerging...
View ArticleQ&A: How True is "Too Big to Fail?"
Is there such a thing as systemic risk in the financial system? Are some of our banking institutions truly "too big to fail?" EFF: The term "systemic risk" is less than 20 years old. It has become a...
View ArticleQ&A: Signs of a Recovery?
I read an article recently profiling five signs that the recession is ending. What signs might you look at to indicate when the recession is ending? EFF/KRF: We are not experts, but know enough about...
View ArticleQ&A: Bias in the EMH?
George Soros claims (in his op-ed in the Wall Street Journal) that the Efficient Market Hypothesis is invalid, because prices in financial markets "always provide a biased view of the future, and that...
View ArticleQ&A: Equity Premium Puzzle
Has the equity premium puzzle gone away? EFF: There never was one. The "puzzle" comes out of a simplified economic model that says the average spread of the equity market return over the t-bill...
View ArticleQ&A: Costs of Corporate Acquisition
Firms often pay a substantial premium to the market price when making acquisitions. Does their willingness to pay a premium suggest the shares of target firms were mispriced? EFF: The empirical...
View ArticleQ&A: Narrowly Held Risks
John Cochrane* has suggested that the historical premiums for small cap and value stocks reflect "narrowly held risks" and that these premiums are likely to shrink in the future "until the markets have...
View ArticleQ&A: Seeking the Optimal Country Weighting Scheme
Financial theory suggests that a global value-weight market portfolio is the logical default position for an equity investor seeking the optimal allocation scheme across countries. What are the...
View ArticleQ&A: Bond Funds or Ladders?
Can you address the pros and cons of short-term bond funds versus laddered bond strategies holding individual issues? (Read the full entry)
View ArticleQ&A: Beta and Stock Returns
Do high-beta stocks have high expected returns? Do stocks with historically above-average betas exhibit above-average realized returns? (Read the full entry)
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