Abstracts - Financial Services Review

Abstracts:

Financial Services Review
Volume 2 Number 1, 1992/1993

A Multicriteria Approach to Mutual Fund Selection
(pp. 1-20) DOWNLOAD FULL-TEXT ARTICLE
Wade D. Cook, Kevin J. Hebner

ABSTRACT
In practice, when investors select a mutual fund, they take into account a number of factors. However, the most popular approach for evaluating mutual funds employs only a single criterion, the funds' mean, risk-adjusted, rate of return (Jensen's alpha coefficient). In the present paper a multicriteria approach to mutual fund selection is presented. The multicriteria of the funds' alpha's, front and back-end load fees, the level of diversification, quality of service, and so on. It also recognizes that individual investors posses heterogeneous attributes and preferences, and hence, allows investors to formulate different ratings (and consequently rankings) of the set of competing mutual funds.

Active Timing Decisions of Equity Mutual Funds
(pp. 21-39) DOWNLOAD FULL-TEXT ARTICLE
Robert Radcliffe, Robert Brooks, Haim Levy

ABSTRACT
In this paper we examine an aspect of professional investment management which has not been adequately documented and studied; the extent to which equity mutual fund managers actively adjust their portfolio's equity risk exposure over time. Estimates of a portfolio's quarter-end beta are developed using the actual stock holdings of the portfolio at the quarter-end. Changes in these beta estimates from one quarter to the next are shown to arise from both passive and active asset allocation. We find that active risk adjustment dominates passive rebalancing and that equity risk exposure is quite variable over time. Thus, individual investors who estimate the equity risk inherent in a portfolio based on a single time series return beta might seriously misestimate the portfolio's current equity risk. We also test whether active risk management is better characterized as anticipatory of future market events or reactive to past market events.

Long-Run Returns on Stock and Bond Portfolios: Implications for Retirement Planning
(pp. 41-49) DOWNLOAD FULL-TEXT ARTICLE
Kirt C. Butler, Dale L. Domian

ABSTRACT
This paper presents asset returns over long holding periods in a form useful for retirement planning. Time diversification, heretofore analyzed for lump-sum investments, still serves to reduce the risk of stock investments when funds are accumulated month by month. We consider investments in five stock and bond asset classes as well as various asset allocation strategies. Probability distributions are computed for retirement wealth over a range of investment horizons.

Nobody Gains from Dollar Cost Averaging Analytical, Numerical and Empirical Results
(pp. 51-61) DOWNLOAD FULL-TEXT ARTICLE
John R. Knight, Lewis Mandell

ABSTRACT
Dollar Cost Averaging is an investment system that is widely advocated by brokerage firms and mutual funds. In its best known form, an investor seeking to put a lump sum into risky assets is counseled to invest the money over a period of time in equal installments in order to avoid the devastating effect of a market fall immediately after a single, lump-sum investment. Using graphical analysis, historical stock market returns, and Monte Carlo simulations, this article demonstrates that no such benefit accrues to a Dollar Cost Averaging Strategy. Two alternative strategies, optimal rebalancing and buy and hold achieve better performance in all three analyses.


THE JOURNAL OF INDIVIDUAL FINANCIAL MANAGEMENT
*Abstracts:* Financial Services Review Volume 2 Number 1, 1992/1993 A Multicriteria Approach to Mutual Fund Selection (pp. 1-20) DOWNLOAD FULL-TEXT ARTICLE Wade D. Cook, Kevin J. Hebner ABSTRACT In practice, when investors select a mutual fund, they take into account a number of factors. However, the most popular approach for evaluating mutual funds employs only a single criterion, the funds' mean, risk-adjusted, rate of return (Jensen's alpha coefficient). In the present paper a multicriteria approach to mutual fund selection is presented. The multicriteria of the funds' alpha's, front and back-end load fees, the level of diversification, quality of service, and so on. It also recognizes that individual investors posses heterogeneous attributes and preferences, and hence, allows investors to formulate different ratings (and consequently rankings) of the set of competing mutual funds. Active Timing Decisions of Equity Mutual Funds (pp. 21-39) DOWNLOAD FULL-TEXT ARTICLE Robert Radcliffe, Robert Brooks, Haim Levy ABSTRACT In this paper we examine an aspect of professional investment management which has not been adequately documented and studied; the extent to which equity mutual fund managers actively adjust their portfolio's equity risk exposure over time. Estimates of a portfolio's quarter-end beta are developed using the actual stock holdings of the portfolio at the quarter-end. Changes in these beta estimates from one quarter to the next are shown to arise from both passive and active asset allocation. We find that active risk adjustment dominates passive rebalancing and that equity risk exposure is quite variable over time. Thus, individual investors who estimate the equity risk inherent in a portfolio based on a single time series return beta might seriously misestimate the portfolio's current equity risk. We also test whether active risk management is better characterized as anticipatory of future market events or reactive to past market events. Long-Run Returns on Stock and Bond Portfolios: Implications for Retirement Planning (pp. 41-49) DOWNLOAD FULL-TEXT ARTICLE Kirt C. Butler, Dale L. Domian ABSTRACT This paper presents asset returns over long holding periods in a form useful for retirement planning. Time diversification, heretofore analyzed for lump-sum investments, still serves to reduce the risk of stock investments when funds are accumulated month by month. We consider investments in five stock and bond asset classes as well as various asset allocation strategies. Probability distributions are computed for retirement wealth over a range of investment horizons. Nobody Gains from Dollar Cost Averaging Analytical, Numerical and Empirical Results (pp. 51-61) DOWNLOAD FULL-TEXT ARTICLE John R. Knight, Lewis Mandell ABSTRACT Dollar Cost Averaging is an investment system that is widely advocated by brokerage firms and mutual funds. In its best known form, an investor seeking to put a lump sum into risky assets is counseled to invest the money over a period of time in equal installments in order to avoid the devastating effect of a market fall immediately after a single, lump-sum investment. Using graphical analysis, historical stock market returns, and Monte Carlo simulations, this article demonstrates that no such benefit accrues to a Dollar Cost Averaging Strategy. Two alternative strategies, optimal rebalancing and buy and hold achieve better performance in all three analyses.