Jun 29, 2009
Essays
By Eugene
F. Fama and Kenneth R. French
Our paper,
"Luck
versus Skill in the Cross Section of Mutual Fund α Estimates",
examines
the performance during 1984-2006 of US mutual funds that invest primarily in US
equities. It is an academic paper with lots of technical detail. The purpose
of this white paper is to provide a summary of the results that are relevant
for investors. We begin by examining the overall α for aggregate wealth
invested in mutual funds. We then turn to the performance of individual funds.
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Jun 23, 2009
Videos
Does it make sense to dollar cost average? It depends. Standard financial analysis says dollar cost averaging is suboptimal. If you focus on only your investment outcome, investing a lump sum immediately lets you construct the best portfolio you can today; slowing the process with dollar cost averaging just keeps you in something other than your best portfolio until you are done. Behavioral finance provides a different perspective. Because of the difference between the way people react to errors of omission and errors of commission, dollar cost averaging may give investors a better expected investment experience.
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Jun 17, 2009
Videos
Although it would be great if we could all hire above average active managers, that only happens in Lake Wobegon. Superior managers may exist, but most investors might as well be picking their managers at random. I describe the challenge of differentiating luck from skill, and explain how intense competition among investors makes the problem even more difficult.
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Jun 12, 2009
Videos
EFF: Last month, I sat down with Dean Edward Snyder and an audience at the Chicago Booth Management Conference. We discussed common questions on the efficient markets hypothesis, the credit crisis, and the business of business schools. There's also an audience Q&A toward the end of the video.
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Jun 9, 2009
Videos
KRF: I explain why active investing is always a negative sum game. We often hear that now is a good time (or a bad time) for active investing. That does not make sense. In aggregate, active investors always underperform by their fees and expenses.
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Jun 9, 2009
Videos
KRF: What does it mean to say there is a flight to quality? For every seller there must be a buyer. After exploring this simple point, I explain how expectations about future cashflows and future returns affect the current price.
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Jun 3, 2009
Essays
by Eugene F. Fama and Kenneth R. French
William F. Sharpe has a great article in the January/February 1991 issue of The Financial Analysts Journal (Vol. 47, No.1, pages 7-9). The title is "The Arithmetic of Active Management." It should be required reading for academics and investment professionals alike.
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May 4, 2009
Essays
by Eugene F. Fama and Kenneth R. French
The cap-weighted market portfolio of NYSE-Amex-Nasdaq stocks delivered a
-38.31% return for 2008. The experience was painful, but was it out of bounds? The volatility of returns also increased a lot during 2008. Was the observed volatility consistent with prior experience? These are the questions addressed here.
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Apr 29, 2009
Q & A
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 return has been too high, given the risk of equities. It is easy to show that this argument is silly. Thus, the returns from equity investing are quite risky. As a result, if the high average stock return of the past is the true long-term expected return, the high volatility of stock returns nevertheless means that getting a positive equity premium (of any size) is highly likely only for holding periods of 35 years (an investment lifetime) or more. Given this result, the historical equity premium does not seem too high.
(
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Apr 29, 2009
Q & A
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 distortions of prices in financial markets may affect the underlying reality." Thoughts?
EFF: All the evidence I know says that market predictions are unbiased. It's understandable, however, that hedge fund managers are immune to this evidence since it's a threat to their existence.
(
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ABOUT FAMA AND FRENCH
Eugene F. Fama
The Robert R.
McCormick Distinguished
Service Professor of
Finance at the University
of Chicago Booth School
of Business
Kenneth R. French
The Carl E. and Catherine
M. Heidt Professor of
Finance at the Tuck
School of Business at
Dartmouth College
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