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Finance and Financial Management

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Chapter 07

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Short Covering In Oil Drives Prices, Steven D. Dolvin Feb 2016

Short Covering In Oil Drives Prices, Steven D. Dolvin

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Suppliers reported an increase in crude oil inventories, yet contrary to supply and demand fundamentals, prices rose. Much of this is attributed to short sellers covering their positions at what is expected to be the low point in prices. See article here, Reuters.


China Suspends Circuit Breakers, Steven D. Dolvin Jan 2016

China Suspends Circuit Breakers, Steven D. Dolvin

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Circuit breakers are designed to slow down (or even halt) panicked selling. However, Chinese authorities recently suspended their newly implemented circuit breakers, as they seemed to be increasing panic (as opposed to reducing it). See article here, Finance Asia.


Warren Buffet Criticizes Money Managers, Steven D. Dolvin Mar 2015

Warren Buffet Criticizes Money Managers, Steven D. Dolvin

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Warren Buffet, a pillar of active management, suggests that most investors are best served by investing in passive index funds. This is primarily due to the high fees charged by managers, particularly those in hedge funds. See article here, Yahoo.


More Evidence For Efficient Markets, Steven D. Dolvin Dec 2014

More Evidence For Efficient Markets, Steven D. Dolvin

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The market's performance this year has surpassed that of most professional money managers. In fact, this is the worst (relative) year in three decades for professionals (see post here, The Reformed Broker). The level of competition and the high level of fees prevent meaningful outperformance. The result -- a large influx of capital into index funds.


Fund Manager Performance, Steven D. Dolvin Sep 2014

Fund Manager Performance, Steven D. Dolvin

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Fund managers, on average, have historically trailed the broad market. However, this year has been exceptionally bad for managers, with only 23% of large-cap funds outperforming the index. See this article (WSJ) for some explanation from Goldman Sachs.


Triple Crown And The Stock Market, Steven D. Dolvin May 2014

Triple Crown And The Stock Market, Steven D. Dolvin

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The "Super Bowl Indicator" is widely known, as the winner of the Super Bowl has been correlated to overall stock market performance. While this does not imply causation, is does make for an interesting discussion of market efficiency. A similar item is the performance of the stock market in years when a horse wins the Triple Crown--the results are not good. So, many people may be watching how California Chrome does in the upcoming Belmont Stakes. See article here, WSJ.


High Frequency Trading And Market Efficiency, Steven D. Dolvin Mar 2014

High Frequency Trading And Market Efficiency, Steven D. Dolvin

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Arbitrage is, essentially, taking advantage of mispricing across (or within) markets to earn a risk-free profit. In an efficient market, such opportunities would be rare. A recent Fed report (see article here, Bloomberg) finds that high frequency traders have effectively reduced the number of arbitrage opportunities, thereby improving market efficiency.


Active Vs. Passive, Steven D. Dolvin Mar 2014

Active Vs. Passive, Steven D. Dolvin

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Market efficiency suggests that passive funds are the way to go, and average returns tend to support this. However, other investors prefer active strategies. Maybe the answer is not "either....or." As a recent Wall Street Journal article reports, both may provide benefits. See article here.


Technical Analysis, Steven D. Dolvin Feb 2014

Technical Analysis, Steven D. Dolvin

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While many investors (particularly those who subscribe to market efficiency) suggest that technical analysis is worthless, market participants still generally track charts, including resistance and support levels, as well as moving averages. With the market recently testing its support and bouncing to higher levels, technical analysts will continue to monitor charts to see if the positive momentum can continue. See article here, Reuters.


Market Timing Vs. Market Efficiency, Steven D. Dolvin Jul 2013

Market Timing Vs. Market Efficiency, Steven D. Dolvin

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Market timers may occasionally be correct, but it takes more than a few right calls to beat the market over the long term. In reality, this continued success is virtually impossible. See the article here, Wall Street Journal.


Man Vs. Machine, Steven D. Dolvin May 2013

Man Vs. Machine, Steven D. Dolvin

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It has always been difficult (if not impossible) to consistently beat the market -- so called "market efficiency." However, it may be even more difficult with the advent of quantitative systems trading -- i.e., algorithmic trading. (See article here, WSJ.)


Efficient Markets?, Steven D. Dolvin Apr 2013

Efficient Markets?, Steven D. Dolvin

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Market efficiency comprises two aspects. First, markets respond quickly to new information. Secondly, and often overlooked, the market responds accurately to this information. The recent twitter hoax (See article here, USA Today) is just one example of the market responding quickly to new information. Whether it is accurate or not is where the debate rages.


Insider Trading, Steven D. Dolvin Nov 2012

Insider Trading, Steven D. Dolvin

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Insider trading (i.e., trading on material nonpublic information) is illegal. However, corporate executives are allowed to trade stock in the firms they manage. This is difficult to reconcile since these executives, in all likelihood, have such information. A recent study by the Wall Street Journal found that executives trading ahead of corporate earnings announcements earned substantially higher returns (or avoided substantially lower losses). See article here.


Control Yourself!, Steven D. Dolvin Jul 2012

Control Yourself!, Steven D. Dolvin

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Sometimes we are our own worst enemies. Research shows that our brains are wired to trade stocks actively, and this often works against us. Even professional managers (such as mutual funds) have a hard time generating consistent outperformance. So, the best managers may be those that understand the psychology of investing and are able to control themselves. See the article here, Wall Street Journal. A good book on the topic is Psychology of Investing, by John Nofsinger.