This paper explores whether passive fund managers who aim to be in the 1st quartile by chasing higher returns (i.e. higher risk) are more likely to achieve their goal compared with those that chase somewhat lesser returns (i.e. lower risk). Using monthly historical returns from 01/01/1979 to 01/01/2018, we show that if a fund’s goal is to achieve higher AUM, it should aim to be in the 1st quartile every year. However, if a fund’s long-term goal is to stay in the 1st quartile, it should aim to be in the 2 nd quartile every year.
This study investigates the relationship between investor optimism, financial knowledge, and advice from a finance professional. While other studies focus on how investor optimism influences financial behavior, this study examines the characteristics associated with investor optimism. We find that optimistic investors think they are more knowledgeable, as measured by subjective financial knowledge. At the same time, optimistic investor they are actually less knowledgeable, as measured by objective investment knowledge. We also find that optimistic investors are more likely to seek assistance from a broker. Our results highlight the importance of investor education on behalf of the finance professional to ensure realistic market and portfolio expectations.
Author(s): Andrew Scott, Wendy Usrey, Shane Enete, Miranda Reiter, and Martin Seay
It is not an easy task to determine how risk averse a household is when members of the household have different levels of risk aversion (Zhang, 2017)¹. Similarly, it is unclear how risk perceptions of members of a household collectively determine the household-level risk perception. It’s argued that the risk aversion of the person with higher risk aversion in a household should be generally employed as the input into construction of an investment policy statement for a household. However, there exists few research studies which provides emperical guidance by examining the relationship between household-level risk perception and a household’s portfolio choice. This current research intends to fill this research gap. [1] In her paper, Zhang showed that a household has a decreasing relative risk aversion when two household members have different relative risk aversions.
This study examines student debt and its effects on the philanthropic behavior of households using data sets from the 2011 to 2017 U.S. Panel Study of Income Dynamics. The empirical results show that the presence of student debt on the balance sheet of a household is associated positively to both the probability of making charitable contributions and the amount of charitable donations. The study also finds that the amount of student debt relates positively to the total amount households contribute to charitable organizations. This paper finds no evidence of a statistically significant relationship between the amount of student debt and the probability that a household will donate to charity.
Modern Portfolio Theory (MPT) and the Efficient Markets Hypothesis (EMH) have influenced portfolio management strategies for an entire generation. Taking the example of an average Canadian family from 1977 to 2016, this paper examines how well MPT and EMH served the baby-boom generation of investors. A model investing strategy was constructed based on the principles of MPT and EMH. The strategy was evaluated for its ability to adequately provide for the subject couple in retirement. Results of this portfolio were compared to other popular investment alternatives. Using generally-accepted rules-of-thumb in financial planning, the MPT strategy was found to have provided an adequate retirement income for the subject couple. Some of the other strategies moderately exceeded the returns of the MPT strategy, while others underperformed this benchmark. Analysis of these discrepancies reinforced the significance of diversificaton and of rebalancing portfolios through dynamic asset allocation.
This research utilizes the National Financial Capability Study (NFCS) funded by the FINRA Investor Education Foundation. The national and state-level data are extracted from the 2015, 2012 and 2009 NFCS State-by-State Surveys, each of which employed nationwide online surveys of over 25,000 American adults. This survey solicits information from individual investors on retirement and non-retirement account investments, actual level of investment sophistication, and self-perceived level of investment sophistication, along with many demographic variables. This study investigates the relationship between actual and perceived investor sophistication to determine retirement preparedness of investors, as well as whether investors understand their level of financial preparedness. It is hypothesized that most investors are not as prepared for retirement nor as sophisticated investors as they believe. Additionally, it is hypothesized that there will be a difference in results related to age, education, and gender.