Q&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? Â 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: Deflation Hedge
Should I put some portion of my portfolio in long-term US Treasury bonds as a hedge against deflation? EFF/KRF:Â Perhaps, but you would have to put a high probability on deflation. Severe downturns in...
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...
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