Portfolio optimization focuses on risk and return prediction, yet implementation costs critically matter. Predicting trading costs is challenging because costs depend on trade size and trader identity, thus impeding a generic solution. We focus on a component of trading costs that applies...

We document that the risks and pre-fee returns of broad hedge fund indices can be accurately matched with simple equity index put writing strategies, which provide monthly liquidity and complete transparency over their state-contingent payoff profiles. This nonlinear risk exposure combines with...

This review article describes recent literature on asset allocation, covering both static and dynamic models. The article focuses on the bond--stock decision and on the implications of return predictability. In the static setting, investors are assumed to be Bayesian, and the role of various...

This paper develops and implements a new test to investigate whether sell-side analysts herd around the consensus when they make stock recommendations. Our empirical results support the herding hypothesis. Stock price reactions following recommendation revisions are stronger when the new...

"Limits of Arbitrage" theories hypothesize that the marginal investor in a particular asset market is a specialized arbitrageur rather than a diversified representative investor. We examine the mortgage-backed securities (MBS) market in this light. We show that the risk of homeowner prepayment,...

Momentum in firm fundamentals, i.e., earnings momentum, explains the performance of strategies based on price momentum. Earnings surprise measures subsume past performance in cross sectional regressions of returns on firm characteristics, and the time-series performance of price momentum...

Portfolio performance in 401(k) plans depends on both the investment menu made available by plan sponsors and participants portfolio decisions. We use a unique dataset of nearly 1 million participants in one thousand pension plans to identify key portfolio inefficiencies in 401(k)...

This paper studies the relation between individuals' mutual fund flows and fund characteristics, establishing three key results. First, consistent with tax motivations, individual investors are reluctant to sell mutual funds that have appreciated in value and are willing to sell losing funds....

This paper evaluates the ability of U.S. investors to allocate their foreign equity portfolios across 44 countries over a 25-year period. We find that U.S. portfolios achieved a significantly higher Sharpe ratio than foreign benchmarks, especially since 1990. We test whether this strong...

We evaluate private equity (PE) performance using investor-specific stochastic discount factors, and examine whether investors could benefit from changing their allocation to PE. Plans invest in PE funds with higher average risk-adjusted performance. This is mainly due to access to successful PE...