Abstracts - Financial Services Review

Abstracts:

Financial Services Review
Volume 5 Number 2, 1996

Risk Aversion Measures: Comparing Attitudes and Asset Allocation
(pp. 87-99) DOWNLOAD FULL-TEXT ARTICLE
Diane K. Schooley, Debra Drecnik Worden

ABSTRACT
Households reported willingness to take financial risk is compared to the riskiness of their portfolios, measured as risky assets to wealth. Overall, their portfolio allocations are reliable indicators of attitudes toward risk, demonstrating an understanding of their relative level of risk taking. Multivariate regression analysis using multiply imputed data from the 1989 Survey of Consumer Finances indicates that households generally exhibit decreasing relative risk aversion. Further, investment in risky assets is significantly related to socioeconomic factors, attitude toward risk taking, desire to leave an estate, and expectations about the adequacy of Social Security and pension income.

A Simulation Approach to the Choice Between Fixed and Adjustable Rate Mortgages
(pp. 101-117) DOWNLOAD FULL-TEXT ARTICLE
William K. Templeton, Robert S. Main, J.B. Orris

ABSTRACT
Mortgage borrowers appear to have a difficult time evaluating the costs and risks associated with the choice between a fixed rate mortgage and an adjustable rate mortgage (ARM). This study uses a simulation approach to model the choice. We represent the risk of the ARM with distributions of present value cost differentials for a variety of mortgage life periods. We provide insight on the financial planning aspect by modeling the impact of mortgage rate changes on the size of payments for ARMs. Simulation can yield non-intuitive results that may lead to better decision making by borrowers.

Personal Finance: An Alternative Approach to Teaching Undergraduate Finance
(pp. 119-131) DOWNLOAD FULL-TEXT ARTICLE
Jill Lynn Vihtelic

ABSTRACT
Effective teaching invites students into the discipline and helps them to see and make connections between the discipline's content and their lives. This paper identifies an alternative approach to effective teaching of undergraduate finance. Personal finance, as opposed to managerial finance, provides a more appropriate foundation on which to center the undergraduate finance curriculum. It better matches students' interests, personal experiences, and cognitive structures. This paper takes the position that personal finance should precede managerial finance as the introduction and start to the finance major in the undergraduate business curriculum.

The Effects of Mutual Fund Managers' Characteristics on Their Portfolio Performance, Risk and Fees (pp. 133-148) DOWNLOAD FULL-TEXT ARTICLE
Joseph H. Golec

ABSTRACT
The purpose of this study is to test whether a mutual fund managers' characteristics helps to explain fund performance, risk and fees. The statistical tests consider performance, risk and fees simultaneously to avoid biased results produced by earlier studies that ignore simultaneity. Results show that a fund's performance, risk and fees are significantly impacted by its manager's characteristics. All else equal, investors can expect better risk-adjusted performance from younger managers with MBA degrees who have longer tenure at their funds. Also, funds with low fees and more diversified portfolios perform better. The most significant predictor of performance is the length of time a manager has managed his or her fund (tenure). Funds that keep administrative expenses low also perform relatively well but large management fees do not necessarily imply poorer performance. Apparently, a large management fee signals superior investment skill which leads to better performance.


THE JOURNAL OF INDIVIDUAL FINANCIAL MANAGEMENT
*Abstracts:* Financial Services Review Volume 5 Number 2, 1996 Risk Aversion Measures: Comparing Attitudes and Asset Allocation (pp. 87-99) DOWNLOAD FULL-TEXT ARTICLE Diane K. Schooley, Debra Drecnik Worden ABSTRACT Households reported willingness to take financial risk is compared to the riskiness of their portfolios, measured as risky assets to wealth. Overall, their portfolio allocations are reliable indicators of attitudes toward risk, demonstrating an understanding of their relative level of risk taking. Multivariate regression analysis using multiply imputed data from the 1989 Survey of Consumer Finances indicates that households generally exhibit decreasing relative risk aversion. Further, investment in risky assets is significantly related to socioeconomic factors, attitude toward risk taking, desire to leave an estate, and expectations about the adequacy of Social Security and pension income. A Simulation Approach to the Choice Between Fixed and Adjustable Rate Mortgages (pp. 101-117) DOWNLOAD FULL-TEXT ARTICLE William K. Templeton, Robert S. Main, J.B. Orris ABSTRACT Mortgage borrowers appear to have a difficult time evaluating the costs and risks associated with the choice between a fixed rate mortgage and an adjustable rate mortgage (ARM). This study uses a simulation approach to model the choice. We represent the risk of the ARM with distributions of present value cost differentials for a variety of mortgage life periods. We provide insight on the financial planning aspect by modeling the impact of mortgage rate changes on the size of payments for ARMs. Simulation can yield non-intuitive results that may lead to better decision making by borrowers. Personal Finance: An Alternative Approach to Teaching Undergraduate Finance (pp. 119-131) DOWNLOAD FULL-TEXT ARTICLE Jill Lynn Vihtelic ABSTRACT Effective teaching invites students into the discipline and helps them to see and make connections between the discipline's content and their lives. This paper identifies an alternative approach to effective teaching of undergraduate finance. Personal finance, as opposed to managerial finance, provides a more appropriate foundation on which to center the undergraduate finance curriculum. It better matches students' interests, personal experiences, and cognitive structures. This paper takes the position that personal finance should precede managerial finance as the introduction and start to the finance major in the undergraduate business curriculum. The Effects of Mutual Fund Managers' Characteristics on Their Portfolio Performance, Risk and Fees (pp. 133-148) DOWNLOAD FULL-TEXT ARTICLE Joseph H. Golec ABSTRACT The purpose of this study is to test whether a mutual fund managers' characteristics helps to explain fund performance, risk and fees. The statistical tests consider performance, risk and fees simultaneously to avoid biased results produced by earlier studies that ignore simultaneity. Results show that a fund's performance, risk and fees are significantly impacted by its manager's characteristics. All else equal, investors can expect better risk-adjusted performance from younger managers with MBA degrees who have longer tenure at their funds. Also, funds with low fees and more diversified portfolios perform better. The most significant predictor of performance is the length of time a manager has managed his or her fund (tenure). Funds that keep administrative expenses low also perform relatively well but large management fees do not necessarily imply poorer performance. Apparently, a large management fee signals superior investment skill which leads to better performance.