Many traditional equity managers focus on particular subsets of the investment universe – value or growth stocks, for example – and structure their portfolios from pre-selected groups. A different approach is argued here, one that takes advantage of the widest possible equity universe and...

Like any revolution, the options revolution that began with the publication of the Black-Scholes-Merton option pricing formula has had some unintended side effects. Of concern to all investors should be the potentially dangerous increase in market instability created by the trading strategies...

Seemingly infallible arbitrage strategies can fail. When they do, they can take the markets down with them. The near collapse of Long-Term Capital Management parallels the experience of portfolio insurance in 1987

That various “styles” of stocks perform differently suggests a strategy of rotating a portfolio's allocations across styles — growth, value, large-cap, and small — in line with changes in the economic environment. The issue then is how to define style. A “high-definition” approach...

Firms that use one valuation model for their core portfolio and different models for subsets of that core may end up with multiple estimates of alpha. But as every asset has only one price, doesn't it follow that the asset should have only one mispricing? It is argued here that it hardly makes...

The optimal level of residual risk for a portfolio is the level that allows the portfolio to provide the highest expected return the manager can generate within the limits of the investor's risk tolerance parameters. As it is not always easy to determine investor risk tolerance or manager...

Smart beta strategies promise to deliver market-beating returns with simplicity and low cost, but the reality is more complicated. Contrary to popular perception, smart beta strategies are neither passive nor well diversified. Nor can they be expected to perform consistently in all market...

Leverage entails a unique set of risks, such as margin calls, which can force investors to liquidate securities at adverse prices. Modern Portfolio Theory (MPT) fails to account for these unique risks. Investors often use portfolio optimization with a leverage constraint to mitigate the risks of...

This paper presents fast algorithms for calculating mean-variance efficient frontiers when the investor can sell securities short as well as buy long, and when a factor and/or scenario model of covariance is assumed. Currently, fast algorithms for factor, scenario, or mixed factor and scenario...

Increased use of expectational data for modeling stock returns places a spotlight on the specification of predictor variables. Choices between alternative specifications of a given predictor such as E/P or earnings trend, for example, can have wide-ranging effects on portfolio selection and...