Edward J. Strafaci ~ Academic Blog

Academics and investing Risk and the stockmarket Jun 1st 2016, 15:55  BY BUTTONWOOD   RISK is linked to reward; it is virtually the first lesson one learns about finance. Safe assets pay low returns; if you want higher returns, you have to risk your capital. Academics have been examining these issues for decades, and have come up with such insights as the capital asset pricing model (CAPM) and the efficient market hypothesis. In turn, investors have applied their insights to the market. The techniques they have adopted may have changed the nature of the market. Risk and reward may not be as securely linked as they used to be. Two papers in the spring  Journal of Portfolio Management  bring these issues to light. The first—“Risk Neglect in Equity Markets” by Malcolm Baker of the Harvard Business School—looks at an obvious flaw in the CAPM. The model suggests that stocks which are more volatile than the overall market (high beta in the jargo...

The global financial system has in recent years managed to absorb rolling debt crises in Greece, military clashes in Ukraine, down-to-the-wire budget fights in Washington and a shock currency devaluation by China. But will it handle  Britain ’s vote on Thursday to leave the  European Union  as well? The lesson of the financial crisis of 2008 is that problems in one country can spread around the world through the markets and the banking system. And so far on Friday, there have been some gut-wrenching moves in global markets. The  British pound  plunged to a level not seen in decades. Italy’s stock market was down more than 10 percent, and France’s was off over 8 percent. The selling hit Japan, where stocks closed down nearly 8 percent. Traders in the United States are bracing for a sharp sell-off, judging by prices in the overnight futures market. Investors sought safety in government bonds. The yield on Germany’s 10-year bond dropped into nega...

The Federal Reserve has an ammo problem. Inflation may be the only way to solve it. Participants in the Fed’s meeting last week not only cut their target-rate projections through 2018, they also lowered estimates for where they think rates will be beyond that. Their median “longer-run” projection for rates  now centers on 3% , well below the 4.25% offered up in 2012, when the Fed began releasing rate projections. % THE WALL STREET JOURNAL Source: Federal Reserve Behind the Rate Ball Federal Reserve policymakers' median longer-run federal-funds rate projection 2013 ’14 ’15 ’16 2.5 3.0 3.5 4.0 4.5 That means that even if the Fed reaches its goal of 2% inflation and full, not-too-hot, not-too-cold employment, it thinks it will take a lower level of overnight rates to keep the economy stable. It is a reflection of a belief that the neutral rate—the inflation-adjusted overnight rate that is consistent with the economy operating at full potential— has fallen in the years s...

BP shareholders balk at a $19 million compensation award for the company’s chief executive officer. Forty-two percent of Anglo American shareholders vote against a $4.9 million executive pay package. Credit Suisse’s CEO asks the board to cut his bonus after an unprofitable year. Frank R. Hopson News headlines have abounded regarding compensation packages for executives this year. But investors’ anger isn’t typically about the compensation levels but rather the misalignment of pay and the underlying corporate performance behind that pay. The BP chief executive’s compensation package increased nearly 20% after the company reported record losses, endured massive layoffs, and froze compensation across the company. Anglo American’s investors watched its stock price plummet 75% in 2015. Ensuring that executive compensation is aligned with corporate performance is no easy feat. Compensation packages need to focus managers on developing and successfully executing the long-term stra...

Averaging Down : This is when an investor buys more of a stock as the price goes down. This makes it so your average purchase price decreases. Bear Market : This is trading talk for the stock market being in a down trend, or a period of falling stock prices. This is the opposite of a bull market. Beta : A measurement of the relationship between the price of a stock and the movement of the whole market. If stock XYZ has a beta of 1.5, that means that for every 1 point move in the market, stock XYZ moves 1.5 points and vice versa. Blue Chip Stocks : These are the large, industry leading companies. They offer a stable record of significant dividend payments and have a reputation of sound fiscal management. The expression is thought to have been derived from blue gambling chips, which is the highest denomination of chips used in casinos. Bull Market : This is when the stock market as a whole is in a prolonged period of increasing stock prices. Opposite of a bear market. ...