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The informativeness of financial analysts’ stock recommendations to investors has become the subject of much scrutiny and debate. This article investigates the investment value of target price (TP) forecasts under the specific angle of factor investing. It provides directions to quantitative portfolio managers for the integration of signals conveyed by those forecasts in systematic and rule-based investment decisions. Using TP data from 1999 to 2019 in Europe and North America, the author first documents a decline in analyst opinion on the performance of most equity factors and finds that their forecasts are style biased. He shows that a long-only strategy that picks best-ranked stocks according to consensus TP implied expected returns (CTPER) generates substantial alpha within large-cap, low-idiosyncratic-risk, and noncyclical stocks. Embedding the CTPER signal into the momentum factor helps materially improve its risk and return profile. Those findings support the idea of adequately using TP forecasts in the design of top-down multifactor portfolio construction frameworks. Key Findings ▪ Financial analyst opinion on the performance of most equity factors has declined over time. Their TP forecasts are style biased. ▪ Long-only strategies that pick the best-ranked stocks according to CTPER generate substantial alpha within large-cap, low-idiosyncratic-risk, and noncyclical stocks. ▪ Enriching the stock selection criterion of the momentum factor with the CTPER signal improves its risk and return profile.

Capital market assumptions (CMAs), which are long-term risk and return forecasts for asset classes, are important pillars of the investment industry. However, applying them reliably in portfolio construction has been (and still is) a challenge in the industry. This article demonstrates that, despite the difficulties, CMAs are useful for building an investment portfolio using a factor approach. Using a small set of macroeconomic factors, the authors detail a methodology for deriving a factor model from CMAs and then use it to show that (1) these factors price the expected returns from CMAs and (2) the mean–variance factor allocations are substantially more stable than the mean–variance asset portfolios. Furthermore, this article outlines a new approach to building an asset portfolio that respects a desired factor allocation. Overall, this article helps reduce the barrier to entry for factor-based portfolio construction by providing a recipe for building factor models and performing factor-based portfolio construction using publicly available CMAs. Key Findings ▪ This article presents a methodology to show that CMA returns can be cross-sectionally priced by a small set of underlying macroeconomic factors, which suggests that the CMA’s risk and return assumptions follow a factor structure. ▪ The mean–variance factor allocations generated by CMAs’ implied factors are intuitive and stable through time under unconstrained mean–variance optimization. ▪ This article presents a new approach to building an asset portfolio that respects a desired or target factor allocation with weights that are practical.

Purpose: Indian stock markets are channelizing financial resources for the economic progress of the country. The Indian Financial Services sector is the subset of the stock market which is playing a key role in stock trading. The Indian Financial Services industry is multifaceted and is growing rapidly both in terms of the robust growth of existing firms and the entry of new players playing a stellar role. This surge in growth of the Financial Services sector led many investors to divert their investment towards the financial services segment. To construct an attractive portfolio, the individual investor should perform a risk-return analysis well in advance. This will assist the investor in determining the risk-return relationship in various securities. Given this background, the study is undertaken to evaluate the risk-return patterns of the Indian Financial Services sector securities. Design/Methodology/Approach: The risk and return of sample group of companies belonging to the Indian Financial Services sector are analyzed to arrive at a monthly return by taking the monthly closing price of five financial investment companies belonging to the Standard & Poor’s BSE Finance Index for the period January 2020 to July 2021. To achieve the objectives various statistical tools such as descriptive statistics, correlation, and Beta are adopted. Also, a paired t-test is performed to check the validity of the hypothesis. Findings: The study has brought to light that India Infoline Finance Ltd (IIFL Finance) has provided the highest monthly returns with a high beta value. Further, the tested hypothesis reveals that there exists a significant difference in the monthly returns of the S&P BSE Finance Index and JSW Holdings. Originality/value: The study emphasizes the risk-return analysis of selected stocks of the Indian Financial Services sector. Potential investors will benefit from this equity analysis because it will enable them to make more intelligent and accurate investment decisions. Paper Type: A case study of the Indian Financial Services Industry

The aim of this study is to verify whether the framing effects of past performance information affect the risk perception of individuals for fixed-income and variable income fund. We assess whether risk perception varies depending on how information is communicated to investors, considering the relevance of possible framing effects arising from how information is presented in investment funds’ prospectuses and reports. This study is aimed at investors (individual and institutional) and fund industry regulators, highlighting the importance of past performance presentation. This article aims to contribute to the area by investigating how investors are influenced by varying perceptions of risk and return on fixed-income and variable-income assets, depending on information presentation format. The approach used is based on a 2x2 factorial quasi-experiment, in which format (within-subject) and time horizon (between-subjects) effects are tested in a sample of 143 respondents. Our results indicate that, for investment in a variable-income fund, a monthly yield presentation format leads to higher perceived risk, and that a framing emphasizing fund value evolution leads to higher perceived returns. As for investment in a fixed-income fund, the framing that emphasizes fund value leads to both higher perceived risk and higher perceived returns. When comparing the results for the two types of investments, the risk perception was higher for variable-income than for fixed income funds. However, perceived returns were higher for fixed income than for variable-income funds due to the framing effect, although realized returns do not corroborate this perception. RESUMO O objetivo deste trabalho foi verificar se efeitos de enquadramento da informação de performance passada afetam a percepção de risco dos indivíduos em fundos de renda fixa e de renda variável. Como lacuna de pesquisa, o artigo visa avaliar se a percepção de risco se altera em função da forma como a informação é repassada ao investidor, sinalizando para a importância da consideração de possíveis efeitos de enquadramento na divulgação de informações nos prospectos e relatórios dos fundos de investimento. Este estudo é direcionado a investidores (individuais e institucionais) e reguladores da indústria de fundos ao destacar a importância da forma na qual a informação de performance é apresentada nos prospectos e relatórios de fundos de investimento. O impacto do artigo na área relaciona-se à investigação de como investidores estão sujeitos a efeitos de mudanças na avaliação de risco e retorno em ativos de renda fixa e variável, a depender de como a informação lhes é apresentada. A abordagem utilizada se baseia em um quase-experimento fatorial 2x2, no qual são testados os efeitos de formato (intra-sujeitos) e de horizonte temporal (entre-sujeitos) em uma amostra de composta por 143 respondentes. Os resultados indicam que, para o investimento em renda variável, a maior percepção de risco foi notada no enquadramento que apresenta a informação de retornos mensais, e o maior retorno esperado no enquadramento com ênfase na evolução do valor da cota. Já para o investimento em renda fixa, tanto a maior percepção de risco quanto o maior retorno esperado ocorrem nos enquadramentos que enfatizam o valor da cota. Na comparação dos resultados dos dois tipos de investimentos, a percepção de risco foi maior para fundos de renda variável do que para fundos de renda fixa. Todavia, a percepção do retorno esperado foi maior para renda fixa do que para o de renda variável em função do efeito de enquadramento, embora o retorno realizado não comprove esta percepção.

This paper proposes a new strategy for portfolio selection in the Brazilian equity market with the use of multifractal detrended fluctuation analysis (MF-DFA) as a mechanism to select assets based on their efficiency levels. Empirical analysis uses daily prices to compose minimum variance (MVP) and maximum Sharpe ratio (MSR) long-only portfolios, and also includes their performances during the COVID-19 pandemic. MF-DFA indicated a multifractal nature for asset price returns, generally associated with long-term persistence. The strategy using the most efficient equities resulted in portfolios with lower levels of systematic risk (betas), indicating that the lack of efficiency is related to higher sensitivity to macroeconomic and conjuncture changes. The MVP portfolio produces higher performance than the alternatives in terms of risk and return. Finally, during the COVID-19 pandemic, besides its consistent negative impacts, MVP and MSR portfolios verified lower losses than the IBOVESPA.

Hajj fund must be managed effectively with a diligent approach of standard risk management. This study examines the level of risk management The Hajj Fund Management Agency (BPKH) performs in optimizing its investments: fund and fixed asset portfolios. The measurement data was initially and purposively retrieved. It was later run and processed through linear programming for further analyses. The results indicate that Sharia banking deposits and gold are riskless assets. As far as other asset portfolios, investments are placed strictly based on direct and indirect participation according to the government's regulations to avoid the pressures of market volatility. This study serves as a reference for regulators in formulating appropriate strategic asset allocation to applied related optimized management of hajj fund investment.JEL Classification: C44, C51, C58, C61, D81, E22, E47How to Cite:Witjaksono, B., & Hamzah. (2021). Optimum Strategic of Asset Allocation for Indonesian Hajj Fund. Signifikan: Jurnal Ilmu Ekonomi, 10(2), 195-208. https://doi.org/10.15408/sjie.v10i2.20020.

Do equity prices efficiently reflect fundamental information, as the efficient markets hypothesis (EMH) suggests? The author challenges financial academicians’ widely held acceptance of the EMH. In a frictionless environment, information acquisition and trading would be costless, transaction prices would reflect information perfectly, prices would follow random walks, and the EMH would be validated. But markets are not frictionless. Academic research commonly invokes an assumption that informed investors have homogeneous expectations. But, given the enormity and complexity of information sets, investor expectations differ. Taking an intraday, microstructure focus, the author explains that price discovery in a nonfrictionless, divergent-expectations environment is a protracted, dynamic process that accentuates intraday price volatility and introduces return autocorrelations. This counters the EMH. He stresses the importance of instituting a market structure that further enhances the operational, and therefore informational, efficiency of a security market. TOPICS:Security analysis and valuation, portfolio theory, statistical methods, exchanges/markets/clearinghouses Key Findings ▪ Given the enormous size and complexity of information sets, equally informed investors form different expectations of stocks’ risks and returns. Consequently, shares do not have unique fundamental values that can be known by research analysts. Rather, prices must be discovered in a marketplace, and the efficiency with which this task is performed depends on how orders are handled and turned into trades (i.e., market structure matters). ▪ In a frictionless, zero-trading-cost market, security prices depend on two factors: risk and return. In a nonfrictionless market, three factors matter: risk, return, and liquidity. Illiquidity is closely associated with price discovery being a noisy, dynamic process. ▪ High-frequency, intraday data show that intraday price volatility is markedly accentuated and that stock returns are autocorrelated (i.e., share prices do not follow random walks). These properties of intraday price formation are manifestations of price discovery being a noisy process, and they explain why share prices can be informationally inefficient.

Using a unique dataset of Societes Civiles de Placement Immobilier (SCPIs), the authors provide evidence that the French nonlisted real estate investment funds market exhibits a substantial level of dispersion in risk and return characteristics. The authors find several attributes to have meaningful explanatory power with respect to such differences in risk and performance. They also find that portfolios of nonlisted real estate investment funds exhibit a substantially lower level of volatility than the average fund in the panel and that 15 SCPIs are enough to capture over 90% of these diversification benefits. Taken together, these results suggest that substantial value can be added by selection and allocation decisions, which could form the basis for a welfare-enhancing open architecture multi-management approach to investment in unlisted real estate investment trusts. TOPICS:Real estate, developed markets, portfolio construction, performance measurement Key Findings ▪ Open architecture and multi-management are untapped sources of added value in the French unlisted real estate fund market. ▪ Through suitable selection and diversification decisions, investors in French real estate funds can achieve substantially higher risk-adjusted performance. ▪ These insights can be of potential relevance for other unlisted real estate investment trust markets.

In this paper, we examine the impact of including environmental, social and governance (ESG) criteria in the allocation of equity portfolios. We focus on the risk and return characteristics of the resulting ESG portfolios and investment strategies. Two specific measures are considered to quantify the ESG performance of a company; the ESG rating and the greenhouse gas (GHG) emission intensity. For both measures, we carry out empirical portfolio analyses with assets in either the STOXX Europe 600 or the Russell 1000 index. The ESG rating data analysis does not provide clear-cut evidence for enhanced performance of portfolios with either high or low ESG scores. We moreover illustrate that the choice of rating agency has a significant impact on the performance of the resulting ESG-constrained portfolios. Secondly, we study the impact of GHG emission reductions and increases. We show that emission reductions do not necessarily lead to increased risk or diminished returns, which gives confidence in a smooth transition towards the green economy pursued by the European Green Deal.

PurposeThis study examines whether female directorship on board is related to firm's risk-taking behavior in India.Design/methodology/approachThe study considers the top 500 listed companies in India during the period 2013 to 2018 for the analysis. The paper employs fixed effects as well as a dynamic panel data model to address the bias in the fixed effects model when the lagged risk outcome is included as an explanatory variable.FindingsThe study finds that the presence of female directors on board is unrelated to the firm's risk-outcomes and the risk-adjusted return earned by the shareholders. The results are in line with the tokenism theory of board diversity. Having a higher share of female independent directors is also unrelated to the risk-taking behavior of firms. The findings are in contrast to the critical mass theory and the agency theory of gender diversity. The study does not rule out the possibility of female directors' risk-preferences being similar to those of male directors.Practical implicationsThe findings suggest that regulations related to having independent female directors may not add value for the shareholders in the short run. The business case for such stringent regulations in India on the gender diversity of boards remains unclear.Originality/valueThis is the first study to analyze the relationship between gender diversity of boards and firm-level risk in India. Most of the studies have focused on gender diversity and firm performance in India. However, modern portfolio theory suggests that both risk and return are important as shareholders care about risk-adjusted returns.

The mean–variance model is widely acknowledged as the foundation of portfolio allocation because it provides a framework for analyzing the trade-off between risk and return for gaining diversification benefits. Despite the well-known shortcomings of the model, it is often the starting point for making asset allocation decisions. In this article, the authors briefly review mean–variance optimization and approaches for resolving its limitations by demonstrating backtest results on asset allocation. Feedback from asset managers is also included to explain how optimization methods are applied in practice. TOPICS:Quantitative methods, statistical methods, portfolio construction, performance measurement Key Findings ▪ Mean–variance optimization provides a framework for analyzing risk–return trade-offs when making asset allocation decisions. ▪ Sensitivity of the mean–variance model can be addressed with robust models, and the model generates candidate asset allocations that are informative in practice. ▪ Feedback from asset managers suggests that mean–variance optimization along with simulation and various robust methods are being applied in practice for asset allocation.

Finance uses the phrase “risk-adjusted returns” to define what value is, and fiduciaries are legally bound to consider both risk and reward in investment decision-making. This requirement is codified in the Uniform Prudent Investor Act, which states, “The trade-off in all investing between risk and return is identified as the fiduciary’s central consideration.” Yet, the most prominent performance metric in private equity (PE) is the internal rate of return (IRR), an inadequate tool for fiduciary purposes because it includes no concept of risk, which represents fully half of the characteristics that fiduciaries are obligated to evaluate. An astute fund manager can exploit this willingness of PE investors to pay for returns that are not creating positive alpha. The key to understanding how a manager can do this lies in examining the role that financial leverage plays in the returns of PE funds and how such financial leverage affects IRRs. Metrics built on the direct alpha public market equivalent (PME) analysis are appropriate to estimate the risk-adjusted returns generated by PE funds and to fulfill fiduciary duties. TOPICS:Private equity, fundamental equity analysis, performance measurement, equity portfolio management Key Findings • The IRR metric is wholly inadequate to perform the function of a fiduciary because it has no concept of risk, which constitutes fully half of the characteristics that fiduciaries are obligated to evaluate. • An astute fund manager can exploit the willingness of PE investors to pay for returns that are not creating positive alphas. • Metrics built on the direct alpha PME analysis are most appropriate to capture the risk and return characteristics that fiduciaries are legally required to consider.

This study is aimed to identify the factors that influence investment decision making by individual investors in the city of Mataram. Due to the importance of investment decision for individual investor, various factors surely are taken into consideration before deciding into some kind of invesment transaction. Survey is conducted on 100 people from different age groups and professions in the city of Mataram. Most of the respondents choose to invest in asset such as real estate and gold, only a few of them choose market securities as investment. The results of the factor analysis show that there are five factors which affect investment decisions of individual investors in the city Mataram, namely financial literacy, advice and protection, future needs, time duration of investment, and risk and return. Keywords: investment decision, individual investor, financial literacy, advice, future needs,time duration, risk and return

In this paper, we propose the new time-varying coefficient GARCH-in-Mean model. The benefit of our model is to allow the risk-return parameter in the mean equation to vary over time. At the end of 2019 to the beginning of 2020, the world witnessed two shocking events: COVID-19 pandemic and 2020 oil price war. So, we decide to use the daily data from December 2, 2019 to May 29, 2020, which cover these two major events. The purpose of this study is to find the dynamic movement between risk and return in four major oil markets: Brent, West Texas Intermediate, Dubai, and Singapore Exchange, during COVID-19 pandemic and 2020 oil price war. For the European oil market, our model found a significant and positive risk-return relationship in Brent during March 26-April 21, 2020. For the North America oil market, our model found a significant positive risk return relationship in West Texas Intermediate (WTI) during March 12-May 8, 2020. For the Middle East oil market, we found a significant and positive risk-return relationship in Dubai during March 12-April 14, 2020. Lastly, for the South East Asia oil market, we found a significant positive risk return relationship in Singapore Exchange (SGX) from March 9-May 29, 2020.

This study begins with the assumption that the existence of abnormal circumstances will force investors to take measures to protect their investments in the capital market Recently, the stock index in the Indonesian market has been declining and continued to fall until the end of April 2020 due to the impact of the Covid-19 pandemic In terms of efficient market theory, prospect theory and signaling theory, this study aims to analyze the relationship between risk and return in the Indonesian capital market during the Covid-19 pandemic as a manifestation of investor behavior To test hypotheses, the correlation test, the independent sample t-test and the Cohen test for 629 public firms with 52,836 observable data are used The findings show that for financial sectors and non-financial sectors, the fourth period differs from previous periods when the relationship between systematic risk and stock returns is positive, although only nonfinancial sectors have a significant effect The results show that efficient market theory, prospect theory and signaling theory are consistent with the phenomena around the Covid-19 pandemic in Indonesia In addition, Cohen's test results suggest that government policies in the face of the pandemic are successful in stimulating the market © 2020 LLC CPC Business Perspectives All rights reserved

PurposeThe study aims to explain the relationship between accounting and finance through measuring the effect of rational working capital management on profitability.Design/methodology/approachEmploying the methodology of semi-structured interviews with sixteen financial managers.FindingsThe findings pointed out the relationship between accounting and finance is complementary, since it supports the accountant by the critical skills and information, like project evaluation, managing the company funding resources and working capital management. These skills put the accountant up to the financial manager stage. The working capital investment and financing policies have the most significant impact on profitability. These policies related to risk and return theory; since the conservative policy will reduce both the risk and return and the aggressive one will have the opposite impact.Originality/valueIt recommends accountants to be in professional stage and increase the profitability of the company to grab both accounting and finance information and skills.

Investors differ in their decisions with respect to risk, returns and market analysis. The present study attempts to examine the influence of financial literacy on retail investors' decisions in relation to return, risk and market analysis. The study uses convenience sampling to collect data from the retail investors through stock brokerage managers. Factor analysis has been employed for understanding factors of financial literacy. Financial literacy is composed of Accounting Information; Market Information; Broad Overview; and Technical Knowledge. The factors of Investment decisions are: Return Analytics; Risk Analytics; and Market. The risk and return analytics have stronger impact on investors decision than market analytics. PLS SEM has been employed for examining relation between financial literacy and Investment decision. The results suggest a significant positive relation between financial literacy and investment decision.

PurposeRisk and return are the most important components in the financial and investment world and the existence of a better balance between them with the goal of the best solution for investing in different assets has always been studied and discussed by researchers. For this purpose in this study introduced the Hybrid Balanced Justified Treynor ratio (HBJTR) criterion.Design/methodology/approachThis study introduced the HBJTR criterion, which has three major attributes, including combination of both the frequency and severity of the risk using Markov regime switching model which was modeled on the Justified Beta (Jßi). The second is the merger of data of both the cycles of boom and recession, which was modeled on the Hybrid Justified Treynor Ratio (HJTR). The third was the balancing act in two periods of boom and recession, which was introduced on the HBJTR model.FindingsBased on a weighted averaging of the Justified Treynor ratio of both the cycles of boom and recession, which was introduced by the HJTR term in this study, the superiority in the first grade related to the two indexes were sugar index (0.0096) and insurance index (0.0053). Finally, using the final model in this study, namely HBJTR, the overall advantage was the defensive index, i.e. the insurance index of 1.23.Originality/valueIn other words, the HBJTRi criterion consists of three steps: first, the Justified Beta (Jßi) and Justified Treynor ratio of each index using two regimes of Markov switching model were calculated for each of the cycles of boom and recession separately according to formulas 8 and 9. In the second step, the weighted average was taken from both Justified Treynor ratios of boom and recession cycles, which was called the HJTR. In the third step, to calculate the HBJTR criterion

Environmental, social, and governance (ESG) ETFs attract investors who are driven by their personal values in investing, but also by investors who believe that ESG investing will produce a favorable return–risk tradeoff. This article looks at the risk and return characteristics of ESG ETFs since their inception (February 2005) through July 2019 and compares them with investable proxies for US (Russell 3000 ETF—IWV) and global (SPDR® Global Dow ETF—DGT) equity markets. Using absolute and risk-adjusted performance measures, the author finds that equal- and value-weighted ESG portfolios outperformed the IWV and DGT in some periods and underperformed in others. However, during the entire period, IWV and DGT outperformed ESG portfolios and had higher absolute- and risk-adjusted performance. TOPICS:Exchange-traded funds and applications, ESG investing Key Findings • Environmental, social, and governance (ESG) ETFs attract investors who are driven by their personal values in investing, but also by investors who believe that ESG investing will produce a favorable return–risk tradeoff. • This article looks at the risk and return characteristics of ESG ETFs since their inception (February 2005) through July 2019 and compares them with the US (Russell 3000 ETF—IWV) and global (SPDR® Global Dow ETF—DGT) equity markets. • The period of study is divided into two bull markets (February 2005 to September 2007 and April 2009 to July 2019) and one bear market (October 2007 to March 2009). ESG portfolios outperformed IWV and DGT in some periods and underperformed in others. However, during the entire period, both IWV and DGT outperformed ESG portfolios, with higher absolute- and risk-adjusted performance. • Results indicate that investors can definitely allocate a portion of their portfolios toward their desired ESG investment as it would help them diversify and lower risk.

This study proposes an investment recommendation model for peer‐to‐peer (P2P) lending. P2P lenders usually are inexpert, so helping them to make the best decision for their investments is vital. In this study, while we aim to compare the performance of different artificial neural network (ANN) models, we evaluate loans from two perspectives: risk and return. The net present value (NPV) is considered as the return variable. To the best of our knowledge, NPV has been used in few studies in the P2P lending context. Considering the advantages of using NPV, we aim to improve decision‐making models in this market by the use of NPV and the integration of supervised learning and optimization algorithms that can be considered as one of our contributions. In order to predict NPV, three ANN models are compared concerning mean square error, mean absolute error, and root‐mean‐square error to find the optimal ANN model. Furthermore, for the risk evaluation, the probability of default of loans is computed using logistic regression. Investors in the P2P lending market can share their assets between different loans, so the procedure of P2P investment is similar to portfolio optimization. In this context, we minimize the risk of a portfolio for a minimum acceptable level of return. To analyse the effectiveness of our proposed model, we compare our decision‐making algorithm with the output of a traditional model. The experimental results on a real‐world data set show that our model leads to a better investment concerning both risk and return.

This article investigates the application of factor investing in corporate bonds. The authors analyze five different long-only factor investment strategies (Value, Equity Momentum, Carry, Quality, Size) within the USD investment grade and high yield market. These factors can explain a significant part of the cross-sectional variation in corporate bond excess returns. Combinations of the single factors turn out to be superior in risk-adjusted terms. Because the correlations between the single factors are low, a combined multi-factor signal benefits from diversification among the factors. A signal blending strategy is particularly suitable for active approaches targeting high alpha. This strategy leads to alphas up to 1.27% within investment grade and 5.90% within high yield. In contrast, a portfolio blending strategy is better aligned with more passive approaches, targeting low turnover and low tracking error. TOPICS:Factor-based models, style investing, performance measurement Key Findings • The authors find a strong positive relationship between Value, Equity Momentum, Size, Carry and Quality and future returns for USD denominated corporate bonds. • Due to the attractive correlation structure of the single factors, a multifactor strategy enhances the risk return profile even further. • The authors’ multifactor strategy leads to alphas up to 1.27% (5.90%) in IG (HY) even after transactions costs are taken into account.

The academic and practitioner literature provides a variety of contradicting theories as to expected consequences of environmental, social, and governance (ESG)-related factors on the risk and return of equity securities. In light of these heterogeneous expectations, this article sets out to empirically investigate the performance characteristics of investable ESG equity funds to assess whether support for a particular direction in performance impact can be found. The dataset comprises index and active equity mutual funds and exchange-traded funds with a US investment focus that indicate the use of ESG factors in their investment process and extends over a period of 15 years (2004–2018). The empirical results are rather mixed. The authors find substantial cross-sectional dispersion in performance among funds. After controlling for style factor exposures, the majority of funds in any of the tested ESG categories does not produce statistically significant positive or negative gross alpha. An industry-based performance contribution analysis reveals that systematic differences in allocations relative to the broad market exist. However, their median contribution to performance is close to zero over time. Overall, return and risk differences of ESG funds can be significant but appear to be mainly driven by fund-specific criteria rather than by a homogeneous ESG factor. As a result, investors would be better served by assessing investment implications on a fund-by-fund basis. TOPICS:ESG investing, mutual fund performance, passive strategies, portfolio theory Key Findings • The majority of environmental, social, and governance (ESG) equity funds in any of the tested categories do not produce statistically significant positive or negative gross alpha. • Systematic differences in industry allocations relative to the broad market exist, but their median contribution to performance is close to zero over time. • Mixed and substantial cross-sectional dispersion in performance among ESG funds suggests that both the direction and magnitude of any risk or return impact is best assessed on a fund-by-fund basis.

This study re-examines the empirical relationship between risk and return from 1994m12 to 2020m08 in fifteen international equity markets employing the novel time-varying Markov switching copula models. We provide first-time insightful evidence of time-varying Markov tail dependence structure and dynamics between risk and return in international equity markets. Results show that the dependence structure is positive for USA, UK, Germany, Italy, Brazil, Australia, Taiwan, Canada, Mexico, Japan, France and South Africa and negative for Singapore, India, Japan and China. Finally, we document the effects of policy uncertainty, geopolitical risk and VIX conditional on different markets states. post-print 433 KB

Purpose The purpose of this paper is to compare simple dynamic withdrawal strategies with the static withdrawal method, examining not only failure rates and ending wealth but also spending. All withdrawal strategies are adjusted for the Internal Revenue Service’s (IRS) required minimum distribution (RMD). In addition, this study investigates the use of small company stocks (SCS) in place of large company stocks (LCS). Results indicate SCS portfolios are superior to large. When returns are poor, some dynamic strategies will not ensure income for life. This study demonstrates that the simplest dynamic strategy is superior to two popular dynamic strategies. Design/methodology/approach Using historical overlapping periods, different withdrawal strategies are examined. Previous studies focused on failure rates and ending wealth. As discussed in Milevsky (2016) different statistical distributions can have similar tail properties (prob of failure) but dissimilar risk and return profile. The detailed examination of both spending and use of small stocks advances the literature in this area. Findings Results indicate that use of small stocks is superior to using large stocks in the portfolios. When US historical stock returns are adjusted downward, there is the potential that some dynamic strategies will not ensure income for life. This study demonstrates that the simplest dynamic strategy is superior to two popular dynamic strategies. Originality/value This paper is the first to examine, in detail, annual spending results for the retiree. Second, it is shown that, overall, SCS are superior to LCS for all stock/bond allocations. Even though absolute downside risk increases slightly, this increase in downside risk is dominated by the upside potential. In other words, the positive skewness of small stock returns along with the cumulative effects of compounding at a higher rate increases both the available wealth for spending and ending wealth. Third, IRS’s RMDs are taken into account for every withdrawal strategy examined. Lastly, it demonstrates that the simplest dynamic strategy is superior to two popular dynamic strategies.

We propose a new modeling approach for the cross section of returns. Our method, Instrumented Principal Component Analysis (IPCA), allows for latent factors and time-varying loadings by introducing observable characteristics that instrument for the unobservable dynamic loadings. If the characteristics/expected return relationship is driven by compensation for exposure to latent risk factors, IPCA will identify the corresponding latent factors. If no such factors exist, IPCA infers that the characteristic effect is compensation without risk and allocates it to an “anomaly” intercept. Studying returns and characteristics at the stock-level, we find that five IPCA factors explain the cross section of average returns significantly more accurately than existing factor models and produce characteristic-associated anomaly intercepts that are small and statistically insignificant. Furthermore, among a large collection of characteristics explored in the literature, only ten are statistically significant at the 1% level in the IPCA specification and are responsible for nearly 100% of the model’s accuracy.

This dissertation aims to explore and evaluate the impact of regulatory initiatives on corporate hedging activities of the non-financial-corporates (NFCs) and corresponding corporate response for risk and return considerations. Corporate hedging and corporate risk management have been extensively studied in finance literature. However, the previous research and theories focused on the rationale to hedge and the optimal hedging mechanisms and failed to consider regulation as an influencing factor. Subsequently, the existing research and theories do not provide a theoretical framework to analyse the impact of regulation on corporate hedging activities (CHA). This study, as such caters to this lacuna and explores the willingness and ability to conduct corporate hedging, as well as formulating an organisational response to manage the impact of regulation. Despite this gap, the literature review allowed a pre-conceptualisation of a model to analyse the impact of regulation on CHA. Subsequently, the study also yielded an initial conceptual framework based on ideas from literature relevant to corporate hedging and organisational response to regulation. The initial model and conceptual framework brought more focus into the research phase and allowed the usage of deductive qualitative analysis (DQA) procedures (Gilgun, 2010). Based on qualitative data from 12 German NFCs, a model (i.e., the impact-analysis-model, IAM) has been developed to systematically analyse the impact of internal and external actions/actors on CHA. This model addressed the first research question (RQ1), namely how EMIR and Basel III impact CHA of German NFCs. The RQ1 findings show that EMIR impacted NFCs mainly through increased costs, higher requirements for systems and processes, and an increased knowhow requisite. Basel III impacted the NFCs by leading to higher costs and less offers for complex and long-dated derivatives. Overall, the impact is regarded as moderate, which failed to affect any changes in the CHA. Furthermore, in the current study, the responses of the NFCs have been investigated and conceptualised based on the organisation response set of Cook et al (1983). The findings here show that NFCs mainly referred to managerial level responses with the impact on their activities categorised as moderate. Finally, the study proposes an integrated conceptual framework. This study offers significant relevance towards risk management and treasury practitioners as well as theorists, regulators, and other policy makers.

This project coins about The Indian investment market. Investment is actually an asset that's created to permit money to grow. The wealth created can be used for a variety of objectives such as situations. Investing would be different things to different people. While investing for a few people mean fixing money to realize a profit, for a few others it also can mean investing time or effort for a few future benefits like investing in one self’s skills or health. Investment helps to channel household savings to the corporate sector, which is utilized to develop the industrial and service sectors and their own use. Today, investors have several options of investment with different peculiarities matching their needs. The funds allocated by the investors to various investment avenues depend largely on the investment objectives perceived by them. Investment examination has become essential for any retail investor. The success of investments is totally dependent on the satisfaction of the investors during the post-investment period and investors’ confidence. The uncertainty of expected return may be a vital part of the investment option. The variations in returns from the expectations of the investors cause risk and therefore the subjective analysis of varied attributes helps for the avoidance of the danger. Theoretically, risk and return go hand in hand, i.e., the upper the danger, the more the return. However, the risk- return knowledge of the investors on different investments might be differing from each other. In this paper, an attempt is made to study the investors’ perception of risk-return of investment and to find the investor's investment pattern.

Risk is a big concern for anyone contemplating investing in new, especially innovative ventures. However, if successful, the returns can be extraordinary, serving as an impetus for many venture capitalists to provide greater funding. Still, many new ventures never see the end of the tunnel, and success stories are scant. The venture capital market is growing, yet many investors feel on edge when investing in new and innovative ventures. This paper is based on field survey data to evaluate the importance of risk and return components of an alternative venture investment approach called diminishing Musharakah (DM). DM has roots in Islamic modes of investment that are more suited for ventures with a higher risk profile. This paper focuses on four key ingredients, i.e., due diligence (DD), flexibility (Flex), moral hazard reduction (MHR), and risk reduction (RR) inherent in this mode of investment. All these components contribute towards the end goal of any investment, i.e., value enhancement (VE). DM is based on investment modes approved by Islamic law, called Shariah, and Islamic jurisprudence, called Fiqh. The analysis and the paper’s results show that the proposed model is perceived as flexible enough to accommodate a wide variety of investment possibilities. The model carries the potential to encourage venture investment through various stages of growth of a venture. The findings are based on original perception data through a field survey across a broad spectrum of banking users who were interested in alternative and Islamic modes of investment. Findings and analysis of the survey data strongly support our connotations. We propose that the Shariah-based investment model presented in this paper will bring a vast new market into play, i.e., the Islamic money market, thus providing greater venture financing possibilities. As a result, we hope that the number of successful venture investment projects will significantly increase over time as we put the proposed investment model into use.

Purpose The purpose of this paper is to introduce an augmented high-order capital asset pricing model (AH-CAPM) as a new risk-based model to price stocks. Design/methodology/approach The AH-CAPM is defined as a linear model with high-order marginal moments and co-moments from the joint distributions of the sorted stock portfolio returns and the market return. Findings The performance of the AH-CAPM is tested in the Chinese and US stock markets. Empirical results show that the high-order marginal moments and co-moments from the joint distributions in AH-CAPM contain the risk and return information implied by the Fama–French factors, indicating it as a better risk measurement. Moreover, the AH-CAPM performs better than the Fama–French three-factor model and the Carhart four-factor model in both the Chinese and US stock markets. Originality/value Overall, this study introduces a new asset pricing model with better measurements to incorporate risk information in the stock market.

The growing interest in private equity means that allocators must carefully evaluate its risk and return. The challenge is that modeling private equity is not straightforward, due to a lack of good quality data and artificially smooth returns. We try to demystify the subject, considering theoretical arguments, historical average returns, and a forward-looking analysis. For institutional investors trying to calibrate their asset allocation decisions for private equity, we lay out a framework for expected returns, albeit one hampered by data limitations, that is based on a discounted cash-flow framework similar to what we use for public stocks and bonds. In particular, we attempt to assess private equity’s realized and estimated expected return edges over lower-cost public equity counterparts. Our estimates display a decreasing trend over time, which does not seem to have slowed the institutional demand for private equity. We conjecture that this is due to investors’ preference for the return-smoothing properties of illiquid assets in general. TOPIC:Private equity Key Findings • A leveraged small-cap public equity index may be a better benchmark for the performance of private equity than the large-cap indices generally used. Further, internal-rates-of-return (IRRs) can be especially misleading if they are compared against the time-weighted returns used for public market indices. • The smoothed returns of private equity understate the true economic risk and are an artifact of the lack of mark-to-market for illiquid assets. • The richening valuations of PE may be a headwind for future returns for the asset class, suggesting a slimmer edge over public equity than long-term averages.

Many corporations face price and quantity uncertainty in commodities for which existing futures and options contracts permit corporations to hedge their risks. Finance theory has demonstrated frictions in capital markets are equivalent to risk‐averse decision‐making: Taking prices and volatilities as exogenous, decision‐makers make optimal hedge decisions as a trade‐off between risk and return. In modeling risk aversion, we use mean‐variance and mean‐value at risk‐utility functions. With options quantified as delta‐equivalent futures, using data from the Commodity Futures Trading Commission and gold companies, we document empirically corporations' hedge ratios appear to respond to changing prices and volatilities in accordance with utility‐function prescriptions.

The risk and return implications of women on boards (WOB) are generally discussed in the arena of individuals’ risk preferences, and most previous studies conclude that women are risk-averse. If this argument is true, then firms with gender-diverse boards are likely to be less competitive in industry because they make less risky decisions. We explore another mechanism called “group dynamics”, through which WOB may moderate the firm risk and return relationship. Based on a relatively large dataset of UK listed firms for the period of 2007–2016, our results reveal a negative relationship between WOB and firm risk, but a positive impact of WOB and firm risk on profitability. Furthermore, we report a positive significant impact of WOB on observable dynamics of the board. Our findings support the group dynamics mechanism through which WOB may reduce risk but improve profitability, nullifying the stereotypical misconception of women as being risk-averse. This is further supported by a positive significant impact of WOB on firm leverage. Our results are robust to endogeneity issues, alternative gender diversity and risk measures. This study endorses recent regulatory changes, worldwide, that promote gender diversity on corporate boards. The study recognizes the group dynamics mechanism that may alter the risk-return relationship.

One of the metrics that portfolio managers often use to gauge the success of factor investing strategies is the factor-to-specific risk ratio. There is much confusion, however, regarding its use and interpretation. Specifically, what is a reasonable level that investors might expect for long–short versus long-only factor portfolios, and how much deviation is normal? Are there limitations with this metric, and is a higher ratio necessarily always better? The authors find that even pure long–short factor mimicking portfolios do not have 100% of risk coming from factors. Using the value factor as an example, a long–short factor mimicking portfolio has an average ex ante factor-to-total-variance ratio of 80%. The long-only version has an even lower ratio of 61%. More importantly, factor-to-total-variance ratios are misleading in that they do not reflect how much risk and return come from the targeted factors versus the nontargeted factors. Counterintuitively, a simple quintile portfolio can have a very high ratio because of exposure to nontargeted factors. Other metrics such as exposure per unit of tracking error, percent of variance contribution, and the factor efficiency ratio are needed to understand how much exposure the portfolio has to the targeted factor and how much risk comes from the latter. TOPICS:Analysis of individual factors/risk premia, factor-based models, style investing Key Findings • Even long–short factor mimicking portfolios that exactly replicate the pure factor returns do not have 100% of risk coming from factors. Using the value factor, a long–short factor-mimicking portfolio has an average ex ante factor-to-total-variance ratio of 80%. • Different aspects of portfolio construction can affect all of these metrics. Portfolio tracking error, misalignment between the estimation and investment universes, and factor definition misalignment can significantly affect the factor-to-total-variance ratio. • Factor-to-total-variance ratios are misleading in that they do not tell us how much risk and return comes from targeted factors. Other metrics such as exposure per unit of tracking error and percent of variance contribution are needed.

In this article, the author provides an alternative to traditional portfolio re-balancing based on changes in asset market values, one informed by equity characteristics. The logic of policy portfolio re-balancing is applied to a framework that uses assets’ 12-month rolling average characteristic values and return volatilities as inputs and re-balances toward those assets that exhibit relatively high characteristic-value-to-volatility ratios. Three important practical constraints are applied to the author’s re-balanced portfolios. The first two constraints relate to asset weights and limit the degree to which a re-balanced portfolio’s individual asset class positions and portfolio-level asset allocation can deviate from a fixed-weight reference policy portfolio. The third constraint is that any re-balanced portfolio is required to have a volatility approximately equal to the representative fixed-weight policy portfolio. The author shows that the longer-term, full-sample performance, both risk and return, of even tightly constrained characteristic-driven policy portfolios is superior to the standard procedure of re-balancing to fixed weights. These results are further validated by measuring the performance of characteristic-driven policy portfolios over rolling sub-samples of the original dataset. In the final section of the article, a meta-optimization technique is introduced that allows investors to select one characteristic-driven policy portfolio among several as the best compromise asset allocation that comes closest to maximally satisfying each of their respective objectives. TOPICS:Portfolio theory, portfolio construction, equity portfolio management Key Findings • Policy portfolios based on re-balancing toward assets that exhibit relatively high characteristic-value-to-volatility ratios are shown to produce better performance relative to standard policy portfolios that re-balance towards fixed policy portfolio weights. • Characteristic-driven policy portfolios exhibit superior performance compared to standard policy portfolios even when the characteristic-driven policy portfolios are highly constrained with respect to their individual asset class positions, portfolio-level asset allocations and volatility profiles. • By means of a simple meta-optimization technique, it is possible to select one characteristic-driven policy portfolio among several as the one that comes closest to maximally satisfying each of their respective objectives.

Changes to the S&P 500 Index have been found to provide a wealth effect to the firms included or removed from the Index. On November 10, 2014, the S&P Dow Indices announced the addition of the firs...

The authors propose the use of short and long portfolios to analyze the risk and return characteristics of trend-following strategies. They present evidence for the asymmetric profitability of trend-following strategies, showing that returns to the long side are more profitable. They also find that the exposure of CTAs to the long and short sides of trend-following strategies have become more biased toward long positions. The main lesson of the study is that the long and short sides should be differentiated in an analysis of dynamic investment strategies. TOPICS:Portfolio construction, commodities, statistical methods, performance measurement

Structured equity-linked products hold a strong position in the asset universe in Europe although they are often considered to be overly complex. Their risk and return profi le is typically presented by simple payoff diagrams and verbal descriptions. We propose to complement the payoff diagrams with information on the payoff's probability distribution and study different presentation formats in an experimental setting with multiple investment decisions. We introduce a flexible framework for designing tailor-made products, which allows us to implement a part of the experiment as an interactive exploration in which the participants experience the risk-return tradeoff and the role of different features of structured products. We find that displaying probability histograms can have a strong effect on the perceived attractiveness of the products by revealing the loss probability. In contrast to common practice, our results suggest that the reference instrument shown in graphical displays should be risk-adjusted to match the risk of the structured product. Otherwise, a preference for lower risk might be misinterpreted as a preference for a specifi c return profi le. These fi ndings can be used to improve information documents for investors such as the "Key Information Document" required by European regulation.

Purpose The purpose of this paper is to investigate the relationship between individual investors’ level of sophistication and their expectations of risk and return in the stock market. Design/methodology/approach The author combines survey and registry data on individual investors in Sweden to obtain 11 sophistication proxies that previous research has related to individuals’ financial decisions. These proxies are related to a survey measure regarding individual investors’ expectations of risk and return in an index fund using linear regressions. Findings The findings in this paper indicate that sophisticated investors have lower risk and higher return expectations that are closer to objective measures than those of less-sophisticated investors. Originality/value These results are important, since they enhance the understanding of the underlying mechanisms through which sophistication can influence financial decisions.

We propose a parsimonious statistical model of firm competition where structural differences in the strength of competitive pressure and the magnitude of return fluctuations above and below the system-wide benchmark translate into a skewed Subbotin or asymmetric exponential power (AEP) distribution of returns to capital. Empirical evidence from US data illustrates that the AEP distribution compares favorably to popular alternative models such as the symmetric or asymmetric Laplace density in terms of goodness of fit when entry and exit dynamics of markets are taken into account.

Over the past 20 years, much has been said, and then unsaid, about how risk capital should be allocated tactically inside financial institutions once strategic or regulatory capital is somehow determined. Although many of the techniques used for this purpose have proven their mettle within various institutions and contexts, the issue appears as unsettled as ever. This article takes a different tack and proposes a synthetic allocation regime combining risk and return, whereby value at risk and a measure of net operating income are the inputs to a reformulated Sharpe ratio driving the allocation. This first step is then combined with a weight-optimization step centered on the Chebyshev polynomial’s minimax property. The authors believe that resolving the internal allocation dilemma lies first in not focusing exclusively on either risk or return as the main driver but rather on their ratio, and second, in objectively and transparently avoiding the boundaries of the domain. Finally, although initial capital allocations should be made without regard for the size of the available market, ultimately one is compelled to pay homage to the prevailing macroeconomic reality. A detailed example of the approach and the mathematical rationale underlying Chebyshev optimization are included as separate appendices. TOPICS:VAR and use of alternative risk measures of trading risk, performance measurement, legal/regulatory/public policy, quantitative methods

We estimate the abnormal performance of real estate assets from cash flows to strengthen the position that open-end core real estate funds earn high (albeit levered) returns. We propose th...

This paper examines whether the intertemporal tradeoffs between risk and return explain mean reversion in sovereign CDS spreads. I test how mean reversion prevents the explosiveness of CDS spreads in Europe. The relationship between risk and return has been widely studied in finance. The results show that, during the pre-crisis period, sovereign CDS spread changes were more consistent with the mean reversion hypothesis for most European countries. I also find strong evidence that the intertemporal tradeoffs between volatility and return explain in part the mean reversion in the markets for European CDS. Moreover, I show that during the crisis period, CDS spreads’ changes are consistent with the random walk hypothesis and mean aversion is more important for large holding periods.

Research Question: The investigation of the optimal allocation of current assets. Motivation: Current assets investment is a decision process which affects firm value. In this paper, we develop a framework that encompasses these decisions by taking into consideration the trade-off between risk and return. Idea: We build up a model implemented in two stages. In the first stage, using random coefficient modeling on panel data, we obtain the estimates of the expected returns and standard deviations for cash holdings, inventories and receivables along with the correlations between them. Having these estimates on hand we move on to the second stage to determine the optimal allocation of current assets portfolio and construct the efficient frontier of the possible combinations of the current assets’ elements. Data: For the purposes of our study we use financial data from Greek manufacturing firms, drawn from their annual income statements and balance sheets. Firms are classified into the manufacturing industry for the years 2003 to 2014. Tools: In the first stage we use random coefficient modeling on panel data while in the second stage mean-variance analysis is employed. Findings: By applying the model in the Greek manufacturing sector we find that the minimum-variance portfolio of the average firm of our data set has an expected return of 10.00% with a 6.14% standard deviation (risk) and consists of 13% cash and cash equivalents, 29% inventories and 58% receivables. Contribution: Our model would be useful to assess and monitor firms’ current assets investments and may be used in the formulation of sound current assets policies and procedures.

PurposeThis paper aims to investigate patterns in UK stock returns related to downside risk, with particular focus on stock returns during financial crises.Design/methodology/approachFirst, stocks are sorted into five quintile portfolios based on the relevant beta values (classic beta, downside beta and upside beta, calculated by the moving window approach). Second, patterns of portfolio returns are examined during various sub-periods. Finally, predictive powers of beta and downside beta are examined.FindingsThe downside risk is observed to have a significant positive impact on contemporaneous stock returns and a negative impact on future returns in general. In contrast, an inverse relationship between risk and return is observed when stocks are sorted by beta, contrary to the classic literature. UK stock returns exhibit clear time sensitivity, especially during financial crises.Originality/valueThis paper focuses on the impact of the downside risk on UK stock returns, assessed via a comprehensive sub-period analysis. This paper fills the gap in the existing literature, in which very few studies examine the time sensitivity in relation to the downside risk and the risk-return anomaly in the UK stock market using a long sample period.

In this paper, I develop a model in which risk-averse investors possess private information regarding both a stock’s expected payoff and its risk. These investors trade in the stock and a derivative whose payoff is driven by the stock’s risk. In equilibrium, the derivative is used to speculate on the stock’s risk and to hedge against adverse fluctuations in the stock’s risk. I analyze the derivative price and variance risk premium that arise in this equilibrium and their predictive power for stock returns. Finally, I examine the relationship between prices and trading volume in the stock and derivative. Received July 31, 2017; editorial decision December 3, 2018 by Editor Stijn Van Nieuwerburgh. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Risk aversion theory is based on individuals’ choice among risky assets with expected utility in its foundation. It is about investor behavior (i.e. investor choice), under normal circumstances, towards assets with various levels of risk. A positive and marginally diminishing relationship between risk and return exists. This study is about investor behavior as it relates to their response (not choice) to risk. We present an argument and supporting evidence that investors’ return response to risk is increasing in level of risk. Thus, investor behavior is subject to change and level of risk is a determinant of such change. We also explain the negative time-series correlation between risk and return.

Interdependence among financial return series primarily originate from correlation between underlying assets. However, correlation fully describes interdependence only if the financial system behaves linearly and if an assumption of multivariate normal distribution additionally holds true. At the same time, with intrinsic z score normalization, correlation ignores means (expected return) and variances (risk) when calibrating the interdependence. Such oversight raises the significant question of whether security return networks can be realistically modelled and interpreted by market correlations. This paper proposes the Euclidean (dis)similarity metric which enables incorporation of risk and return along with the primary correlation component. We apply this metric to explain the collective behavior of the MSCI world market and compare the results with other correlation networks. Findings show that realized volatility accounts for 71% of the observed topology whereas correlation explains only 29% of market structure. No evidence was found supporting the importance of expected return. Power law exponents and degree distributions reveal that the centrality of hub nodes are considerably higher in the Euclidean as opposed to correlation networks. Accordingly, the importance and influence of central countries (like US and Japan hubs) in the spreading of high volatility is considerably higher than what correlation networks report.