Finance and Financial Management Commons^™

Ipo Advice, Steven D. Dolvin

All Chapters

IPOs generally experience a positive first day return, so-called underpricing. However, this return primarily accrues to those who are fortunate enough to receive an allocation of shares at the offer price. A recent article in the Wall Street Journal provides some advice for those interested in investing in IPOs. See the article here.

Bonds = Safe Investment?, Steven D. Dolvin

All Chapters

As the recent offering of bonds by Apple illustrates, bonds are subject to their own types of risk. In particular, price risk exists since prices react to changes in interest rates. As is the case with the Apple bonds, a recent rise in rates has significantly reduced the price of these bonds, leading to a capital loss for bondholders. See article here, International Finance Review.

Pray For A Bear Market?, Steven D. Dolvin

All Chapters

Most investors save for retirement using company sponsored 401(k) plans -- making investments into the account every month. This is a form of dollar cost averaging. For this type of investment, a bear market might be the best situation, as it will enable investors to buy more shares at lower prices. Since we want to "buy low and sell high," this downward volatility might actually help us. This is counter to what many people would think. See a related article here, Wall Street Journal.

Options For Everyone?, Steven D. Dolvin

All Chapters

Options (and derivatives in general) are often painted by the media as financial time bombs. While they can be used for speculative trading, they can also be used for hedging as well. Unfortunately, many smaller investors are not skilled in their use, which has led to significant losses for many. See article here, NY Times.

Central Banks Propel Equity Markets, Steven D. Dolvin

All Chapters

Japan's central bank recently instituted a significant expansionary monetary policy. The market's immediate response was to increase, and the rise has continued since the announcement. Easy money provides liquidity. While this can be offset by inflation, the lack of wage growth has kept inflation muted. Thus, equity markets have responded favorably. See article here, The Economist.

Trading Issues, Steven D. Dolvin

All Chapters

This is an excellent read on the mechanics of market microstructure, particularly as it relates to "mini-crashes" in individual stocks: Erroneous Combustion, CFA Institute.

This article discusses the efficacy (or lack thereof) of the new limit up / limit down circuit breakers on individual stocks: The Trade.

Hot Market?, Steven D. Dolvin

All Chapters

Initial Public Offerings (IPOs) have increased in size and number during the recent bull market. IPOs tend to follow market cycles, particularly in environments where volatility is less pronounced. This gives firms more pricing stability, combined with increased investor appetite -- obviously the right mix for IPOs. ()

Man Vs. Machine, Steven D. Dolvin

All Chapters

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.)

Margin Debt, Steven D. Dolvin

All Chapters

Margin debt hit its highest level ($379.5 billion) since July 2007. The increase is being driven by low rates and a rising market. As history shows, however, this level of debt could accelerate a small downturn in the market. (See article here, WSJ.)

Target Date Funds, Steven D. Dolvin

All Chapters

Target Date (or "lifecycle") Funds are investments on "auto pilot." Fund managers allocate assets across funds based on the set (target) retirement date and manage the allocation accordingly as time passes. These funds are best suited as "all or nothing" investments, meaning investors should put all their money in a target date fund or else manage their assets on their own. Unfortunately, many investors allocate funds to lifecycle investments as if it were its own investment category. This is particularly true in retirement plans where participants often exhibit the "1/n" phenomenon, allocating there money equally across the "n" investments in …

Google Search, Steven D. Dolvin

All Chapters

A recent study (See paper here, Nature) finds that the level of searches by particular terms is highly correlated to overall portfolio returns, particularly when trading strategies are based on these terms. The idea is that the search terms are a predictor of trading behavior, whether bullish or bearish.

Efficient Markets?, Steven D. Dolvin

All Chapters

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.

Circuit Breakers, Steven D. Dolvin

All Chapters

Following the "Flash Crash" in 2010, the SEC implemented new trading curbs. Following continued discussion, these curbs have been updated once again--for both individual stocks and the market as a whole. See this Bloomberg article and this NYSE summary.

Exit Strategies, Steven D. Dolvin

All Chapters

Unfortunately, picking the next winning stock is only half the battle. Many investments have strong gains, but end up losing because investors fail to exit their holdings at the right time. Trailing stop orders are one way to help mitigate this issue. (See article here, Yahoo Finance.)

History Lesson: Momentum, Steven D. Dolvin

All Chapters

We often talk about buying low and selling high, but many individual investors often do the opposite. Particularly in retail accounts and 401(k) plans, investors are often "late to the party," waiting until the market hits a high to reenter. This behavioral bias results in momentum that may drive the market higher, but how long is the key question. Further, investors would be better suited taking a more disciplined periodic investment approach. With the market just hitting a high, this issue is currently at play. (See article here, WSJ.)

Death Cross For Gold, Steven D. Dolvin

All Chapters

For technical traders, a death cross is definitely a sell sign. A death cross occurs when a shorter term moving average (such as the 50 day) crosses a longer term moving average (such as the 200 day) to the downside. Gold recently experienced such an event. However, fundamental traders are often at odds with this belief. (See article here, Yahoo Finance.)

If You Don't Want To Be An Engineer...., Steven D. Dolvin

All Chapters

Recent surveys suggest that engineers (chemical, mechanical, etc.) are the highest earning undergraduate majors -- most in the $60-65K range. Finance is the next highest, at $57,600. So, it seems you have made a good investment by selecting finance as your major. (See article here, Fox Business / Business News Daily.)

Bond Portfolio Duration, Steven D. Dolvin

All Chapters

Duration is a measure of the effective maturity of a bond or bond portfolio. A higher duration is indicative of higher price risk, particularly in response to changing rates. Thus, if interest rates rise and bond prices fall, a bond with a higher duration will experience a sharper drop in price. Given the relatively low level of interest rates in the current market, bond investors have moved to lower duration portfolios, as protection against expected increases in rates. (See article here, Wall Street Journal.)

Increased Leverage = Less Risk?, Steven D. Dolvin

All Chapters

All else equal, the use of leverage increases investment risk. But, can it ever have the opposite effect? Investors using the so-called risk parity trade believe the answer is yes. Under this approach, a portfolio is built using equity and debt, but the debt is purchased using leverage. The strategy is based on two key points: (1) equity is more volatile than debt and (2) debt returns are negatively correlated to equity returns. Thus, with leverage, the debt returns are in effect more volatile. When combined, the negative correlation creates a less risky portfolio as the equity and debt returns …

R-Squared And Fund Selection, Steven D. Dolvin

All Chapters

R-squared is the correlation (i.e., r) of a fund to its benchmark index multiplied by itself (i.e., squared). R-squared measures how closely a fund tracks its respective index. A recent article (see here, Wall Street Journal) suggests that investors should search for actively managed funds with low R-squareds, as this suggests the manager is truly trying to add value by concentrating on specific sectors of the benchmark universe. However, doing so increases systematic risk. So, there is a tradeoff.

Circuit Breakers In Response To Flash Crash, Steven D. Dolvin

All Chapters

Following the "Flash Crash," the exchanges implemented single stock circuit breakers (in addition to the market-wide constraints that already existed). These new circuit breakers are already under review, with planned changes set to go into effect in April. See article here, Bloomberg.

Snow Futures?, Steven D. Dolvin

All Chapters

Futures contracts are typically viewed as speculative investments; however, much of the activity in such contracts is the result of hedging. For example, insurance companies use weather derivatives to hedge exposure to natural disasters, while farmers and food producers would transact in agricultural futures. The most recent addition to such categories is snow futures. See article here, CME Group.

Are Hedge Funds Worth It?, Steven D. Dolvin

All Chapters

Hedge funds typically charge high fees for their services -- generally a 2% yearly management fee plus 20% of profits. When this is factored in, most investors would be better off choosing a low cost ETF. See article here, The Economist.

Low Volatility Etfs, Steven D. Dolvin

All Chapters

A recent trend is the development of low volatility funds, including both ETFs and mutual. These funds invest in a subset of a specified index, selecting only those stocks with low price volatility (which may be identified by a low beta). There is not sufficient history to gauge the performance of such funds, but two issues are worth noting. First, given the impact of volatility on compounded returns (i.e., geometric averages are lower than arithmetic averages), low volatility funds should have an advantage, particularly in otherwise volatile markets. Second, value funds may outperform over long periods (albeit not every period), …

Student Loan Debt, Steven D. Dolvin

All Chapters

Obviously real estate was the focus of the recent credit (or subprime) crisis. However, many investors believe that student loan debt, which is also bundled and sold (i.e., collateralized), is the next "crisis" area. Student debt has risen substantially, as has the percentage of borrowers in delinquency. See these two articles: Wall Street Journal and New York Times.

Insider Trading, Steven D. Dolvin

All Chapters

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.

Fiscal Cliff, Steven D. Dolvin

All Chapters

There has been much discussion surrounding the impending "fiscal cliff." So, what exactly is this? Well, it is a combination of items that effectively equate to about $600 billion in potential spending cuts and tax increases. This represents about 4% of US GDP. So, failing to address these issues would likely result in a deep, prolonged recession. Read a good summary here, American Action Forum.

Index Etfs -- Not Created Equal, Steven D. Dolvin

All Chapters

You might expect that all "Large Cap" ETFs are the same, as they would likely track the S&P500 index. However, in an effort to reduce costs, many ETF providers (such as Vanguard) are replacing the standard index with others that charge lower licensing fees. This allows the providers to either reduce the expenses they charge or increase operating margins. As providers make this switch, it could also impact the underlying holdings to the extent that differences occur across the indexes. See article here, Wall Street Journal.

"Alternative" Alternative Investments, Steven D. Dolvin

All Chapters

Typical Alternative Investments include such categories as commodities and real estate. However, some investors have branched out into more esoteric assets such as cars and collectibles. As such, there is a growing category of managers offering such funds. See the article here, Wall Street Journal.

Apple: Head And Shoulders, Steven D. Dolvin

All Chapters

In technical analysis, traders look for patterns in stock prices, which they then use to determine buy/sell decisions. One such pattern is the "head and shoulders," which, as the name suggests, is two small peaks, with a larger one in the middle. Such a pattern is often considered bearish, particularly if the price breaks through the "neckline." Unfortunately (or not, depending on your view of technical analysis), Apple's share price recently exhibited this pattern. See the article here, Yahoo.