Q&A: Expected Return and Stimulus Efforts
What can we say about expected return if we do not think the stimulus plan can have positive impact on the economy? EFF/KRF: The recent sharp decline in prices suggests that the market does not think...
View ArticleQ&A: Hedging Inflation with Bonds
Is cash (that is, short-term riskless bonds) a safe investment if we think about future consumption and not about nominal dollars? EFF/KRF: Short-term high grade bonds are a good hedge against...
View ArticleQ&A: Stock Returns Under Socialism
Newsweek recently proclaimed "we are all socialists now". How has government intervention changed expected stock returns? EFF/KRF: Government intervention affects the market in two ways. First, it...
View ArticleQ&A: Capitalism Under Obama
Some political commentators argue that Obama's economic policies are our path to ruin. Is capitalism really threatened by our recent political decisions? EFF/KRF: Even in good times, economic systems...
View ArticleQ&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 Article