CFA Institute: CFA Digest: Table of Contents

Editor’s Comments

Thu, 01 May 2008 13:59:17 GMT

CFA Digest May 2008, Vol. 38, No. 2: 1-2.
A comprehensive summary of the articles contained in this digest.

Alternative Routes to Hedge Fund Return Replication

cfapubs@cfainstitute.org (Keith H. Black) — Thu, 01 May 2008 13:59:13 GMT

CFA Digest May 2008, Vol. 38, No. 2: 3-5.
As the hedge fund universe has become larger and more institutionalized, the value added by hedge fund managers has been declining. The replication of hedge funds may be able to provide returns similar to hedge funds without the ...

Are Hedge Fund Strategies Just about Leverage?

cfapubs@cfainstitute.org (Jonathan Wheeler Hubbard) — Thu, 01 May 2008 13:59:10 GMT

CFA Digest May 2008, Vol. 38, No. 2: 6-7.
As investor focus on hedge funds has increased, so has the importance of how hedge funds achieve their returns. Many hedge funds use leverage, either explicitly or implicitly, in their strategies, raising the question of whether hedge ...

Divisional Reverse Leveraged Buyout: Finishing School or Financial Arbitrage?

cfapubs@cfainstitute.org (William A. Trent) — Thu, 01 May 2008 13:59:11 GMT

CFA Digest May 2008, Vol. 38, No. 2: 8-10.
Leveraged buyout (LBO) proponents argue that the discipline of debt and reduction of agency costs inherent in LBOs enhance the target’s operational performance. Critics argue that these traits simply result in a wealth transfer from ...

Do Market Timing Hedge Funds Time the Market?

cfapubs@cfainstitute.org (Kathryn Dixon Jost) — Thu, 01 May 2008 13:59:19 GMT

CFA Digest May 2008, Vol. 38, No. 2: 11-13.
Research to date has focused primarily on testing the timing ability of mutual funds and pension funds and has shown little evidence to support such an ability. The authors present their findings of tests for timing ability in hedge ...

On the Relative Performance of Multi-Strategy and Funds of Hedge Funds

cfapubs@cfainstitute.org (Jonathan Wheeler Hubbard) — Thu, 01 May 2008 13:59:16 GMT

CFA Digest May 2008, Vol. 38, No. 2: 14-15.
In recent years, the hedge fund industry has experienced significant growth in funds of hedge funds (FOFs) and multistrategy (MS) funds. Both strategies offer diversification by investing in multiple hedge fund strategies, but their ...

A Simple Model for the Expected Premium for Hedge Fund Lockups

cfapubs@cfainstitute.org (Brendan F. O’Connell) — Thu, 01 May 2008 13:59:21 GMT

CFA Digest May 2008, Vol. 38, No. 2: 16-17.
The author develops a model for the expected premium for investing in hedge funds with extended lockup periods and finds that the premium is proportional to the standard deviation of returns of a strategy.

Why Do Hedge Funds Stop Reporting Performance?

cfapubs@cfainstitute.org (Christopher B. Wiese) — Thu, 01 May 2008 13:59:08 GMT

CFA Digest May 2008, Vol. 38, No. 2: 18-20.
Hedge fund performance reporting is not mandatory. Those hedge funds that voluntarily report their performance results often later opt to cease performance reporting. The authors investigate whether the cessation of performance ...

Agency Conflicts in Delegated Portfolio Management: Evidence from Namesake Mutual Funds

cfapubs@cfainstitute.org (Frank T. Magiera) — Thu, 01 May 2008 13:59:25 GMT

CFA Digest May 2008, Vol. 38, No. 2: 21-23.
A namesake mutual fund manager has a significant ownership interest in both the fund management company and the fund itself and usually serves as a director or even board chair of the fund. The ownership and management structure leads ...

Board Composition, Corporate Performance, and the Cadbury Committee Recommendation

cfapubs@cfainstitute.org (Daniel J. Larocco) — Thu, 01 May 2008 13:59:23 GMT

CFA Digest May 2008, Vol. 38, No. 2: 24-25.
In 1992, the United Kingdom’s Cadbury Committee released its report on best practices in corporate governance. One of its principal recommendations was that all publicly traded companies have at least three outside directors. Although ...

Corporate Governance, Sarbanes-Oxley, and Small-Cap Firm Performance

cfapubs@cfainstitute.org (Daniel J. Larocco) — Thu, 01 May 2008 13:59:13 GMT

CFA Digest May 2008, Vol. 38, No. 2: 26-27.
Many people have argued that the Sarbanes–Oxley Act of 2002 (SOX) places an excessive reporting burden on small companies. The author examines this hypothesis by comparing the market valuations of small-capitalization Canadian ...

Why Do Countries Matter So Much for Corporate Governance?

cfapubs@cfainstitute.org (William A. Trent) — Thu, 01 May 2008 13:59:23 GMT

CFA Digest May 2008, Vol. 38, No. 2: 28-30.
The authors develop and test a model of how country characteristics, such as legal protection and level of economic development, influence the likelihood of firms within those countries improving their corporate governance practices. ...

Less Risk for Strong Returns in Bond Portfolios

cfapubs@cfainstitute.org (Brian A. Maris) — Thu, 01 May 2008 13:59:22 GMT

CFA Digest May 2008, Vol. 38, No. 2: 31-32.
An important measure of risk for bond investors is the variance of bond price. The authors use two models to estimate the relationship between yield level and the variance of bond price. The results show that for short-term bonds, the ...

Original Issue High-Yield Bonds

cfapubs@cfainstitute.org (Daniel J. Larocco) — Thu, 01 May 2008 13:59:20 GMT

CFA Digest May 2008, Vol. 38, No. 2: 33-34.
Bonds may become classified as speculative grade in one of two ways. One is to be downgraded; the other is to be issued originally in that form. But regardless of how bonds become so classified, market logic would indicate that their ...

Time-Varying Risk and Return Characteristics of US and European Bond Markets: Implications for Efficient Portfolio Allocation

cfapubs@cfainstitute.org (M.E. Ellis) — Thu, 01 May 2008 13:59:26 GMT

CFA Digest May 2008, Vol. 38, No. 2: 35-37.
In-country and U.S.-based return and return volatility are examined for U.S., German, Swiss, and U.K. long-term government bond markets for the 1964–2006 period by using the coefficient of variation (CV = standard deviation/mean) as a ...

The Decline in the U.S. Personal Saving Rate: Is It Real and Is It a Puzzle?

cfapubs@cfainstitute.org (Brendan F. O’Connell) — Thu, 01 May 2008 13:59:18 GMT

CFA Digest May 2008, Vol. 38, No. 2: 38-40.
The authors look at the U.S. personal saving rate, which has trended down since the mid-1990s. The authors look at issues concerning its measurement and consider whether we need to be concerned. They also look at a number of theories ...

Asset Fire Sales (and Purchases) in Equity Markets

cfapubs@cfainstitute.org (Charles F. Peake) — Thu, 01 May 2008 13:59:08 GMT

CFA Digest May 2008, Vol. 38, No. 2: 41-43.
Mutual funds that experience large outflows of funds must quickly reduce their asset holdings, which generates sales at significant “fire sale” prices. The authors document the process and show that mutual funds do not mitigate the ...

Asset Pricing in China’s Domestic Stock Markets: Is There a Logic?

cfapubs@cfainstitute.org (William H. Sackley) — Thu, 01 May 2008 13:59:07 GMT

CFA Digest May 2008, Vol. 38, No. 2: 44-46.
Chinese stock markets have been characterized as being relatively irrational in their security pricing. The authors test four hypotheses regarding pricing as it relates to risk and other characteristics of the Chinese markets. Given ...

Asymmetries in Stock Returns: Statistical Tests and Economic Evaluation

cfapubs@cfainstitute.org (Rajiv Kalra) — Thu, 01 May 2008 13:59:19 GMT

CFA Digest May 2008, Vol. 38, No. 2: 47-49.
The authors provide a model-free test for unequal correlations in which stocks move more often with the market during periods when the market goes down than when it goes up. They also offer tests for asymmetric betas and covariances. ...

Do Mutual Funds Time the Market? Evidence from Portfolio Holdings

cfapubs@cfainstitute.org (Daniel J. Larocco) — Thu, 01 May 2008 13:59:18 GMT

CFA Digest May 2008, Vol. 38, No. 2: 50-51.
Although existing literature has documented that stock market returns in the aggregate are predictable, other studies have found little evidence of market-timing ability by mutual funds. The authors take a new approach to evaluating ...

Liquidity and Expected Returns: Lessons from Emerging Markets

cfapubs@cfainstitute.org (Yazann S. Romahi) — Thu, 01 May 2008 13:59:26 GMT

CFA Digest May 2008, Vol. 38, No. 2: 52-54.
A common, widely held view is that liquidity is priced. In other words, securities with returns that are positively correlated with market liquidity should have high expected returns. Emerging markets provide an ideal setting to test ...

Patterns in Analysts’ Long-Term Earnings Forecasts

cfapubs@cfainstitute.org (Daniel J. Larocco) — Thu, 01 May 2008 13:59:21 GMT

CFA Digest May 2008, Vol. 38, No. 2: 55-56.
Much literature in the field of investments is devoted to studying the significance of the earnings estimates of analysts. Certainly, to the extent that analysts’ forecasts are of superior quality, superior investment results should ...

Building the Organization to Support the 130/30 Opportunity

cfapubs@cfainstitute.org (Chenchuramaiah T. Bathala) — Thu, 01 May 2008 13:59:25 GMT

CFA Digest May 2008, Vol. 38, No. 2: 57-59.
The 130/30 investment strategy refers to portfolios that are 130 percent long and 30 percent short. The use of such a long–short combination is gaining momentum among fund managers—notably, pension funds. The authors describe various ...

Long-Term Return Reversals: Overreaction or Taxes?

cfapubs@cfainstitute.org (Daren E. Miller) — Thu, 01 May 2008 13:59:14 GMT

CFA Digest May 2008, Vol. 38, No. 2: 60-62.
Market reversals over the long run have been previously explained as an irrational overreaction to news. New research shows that deferred capital gains in U.S. stocks cause long-term reversals as those wanting to acquire the stocks ...

Portfolio Performance Manipulation and Manipulation-Proof Performance Measures

cfapubs@cfainstitute.org (Johann U. de Villiers) — Thu, 01 May 2008 13:59:06 GMT

CFA Digest May 2008, Vol. 38, No. 2: 63-65.
The methods commonly used for portfolio performance measurement (the Sharpe ratio and capital asset pricing model alpha, among others) can be manipulated to induce measurement errors. Uninformed portfolio managers can thereby appear ...

Diversification in Portfolios of Individual Stocks: 100 Stocks Are Not Enough

cfapubs@cfainstitute.org (Frank T. Magiera) — Thu, 01 May 2008 13:59:12 GMT

CFA Digest May 2008, Vol. 38, No. 2: 66-68.
Standard investment methodology suggests much of the benefit from diversification is achieved with a portfolio of between 8 and 20 stocks. Investors with a long-term investment horizon, however, might be concerned with shortfall risk ...

Does Sovereign Debt Ratings News Spill Over to International Stock Markets?

cfapubs@cfainstitute.org (Stephen Phillip Huffman) — Thu, 01 May 2008 13:59:10 GMT

CFA Digest May 2008, Vol. 38, No. 2: 69-71.
The authors find an asymmetric equity market reaction to changes in credit ratings and outlooks for sovereign debt. Specifically, they find a significant negative stock market reaction for nonevent countries to the downgrade of the ...

Implied Volatility and Future Portfolio Returns

cfapubs@cfainstitute.org (Christopher J. Sullivan) — Thu, 01 May 2008 13:59:09 GMT

CFA Digest May 2008, Vol. 38, No. 2: 72-74.
The level of the Chicago Board Options Exchange Volatility Index (VIX) has been shown to predict returns on equity indices in the literature of finance. This forecasting power implies VIX variables may be priced risk factors in time ...

Importance of Style Diversification for Equity Country Selection

cfapubs@cfainstitute.org (Edgar J. Sullivan) — Thu, 01 May 2008 13:59:21 GMT

CFA Digest May 2008, Vol. 38, No. 2: 75-77.
The authors find that style diversification—combining fundamental and momentum variables—delivers significantly higher market excess returns with lower risk than either a fundamental or a momentum-oriented strategy produces ...

Improved Forecasting of Mutual Fund Alphas and Betas

cfapubs@cfainstitute.org (Charles F. Peake) — Thu, 01 May 2008 13:59:17 GMT

CFA Digest May 2008, Vol. 38, No. 2: 78-80.
Applying an ordinary least-squares (OLS) model to identify a mutual fund manager with special talents incurs misspecification errors that lead to poor forecasts. The authors use backtests to identify funds with past predictive success ...

Revisiting the Home Bias Puzzle: Downside Equity Risk

cfapubs@cfainstitute.org (Bruce D. Phelps) — Thu, 01 May 2008 13:59:14 GMT

CFA Digest May 2008, Vol. 38, No. 2: 81-83.
The authors seek to explain the observation that investors hold a smaller allocation of foreign equity than suggested by the mean–variance portfolio allocation model. The authors suggest this home “bias” may be the result of investors ...

Timing Small versus Large Stocks

cfapubs@cfainstitute.org (Yazann S. Romahi) — Thu, 01 May 2008 13:59:15 GMT

CFA Digest May 2008, Vol. 38, No. 2: 84-86.
Although over the long term small-capitalization stocks outperform large-cap stocks, timing their relative performance is key if this information is to be used in a strategy. The authors apply three nonparametric techniques derived ...

An Alternative Approach to After-Tax Valuation

cfapubs@cfainstitute.org (Frank T. Magiera) — Thu, 01 May 2008 13:59:20 GMT

CFA Digest May 2008, Vol. 38, No. 2: 87-88.
Investors have many types of investment accounts to choose from based on tax treatment, such as taxable and tax deferred. Prior research has argued that after-tax value available for current consumption has an important effect on the ...

Guidelines for Withdrawal Rates and Portfolio Safety during Retirement

cfapubs@cfainstitute.org (Daniel J. Larocco) — Thu, 01 May 2008 13:59:24 GMT

CFA Digest May 2008, Vol. 38, No. 2: 89-90.
For individuals drawing on retirement funds, the current consensus recommends a 4 percent withdrawal rate because this amount represents only a small chance of the portfolio running out of money. Because of the number of variables ...

Taxation without Replication

cfapubs@cfainstitute.org (Kathryn Dixon Jost) — Thu, 01 May 2008 13:59:23 GMT

CFA Digest May 2008, Vol. 38, No. 2: 91-93.
On a before-tax basis, replication of an underlying with a derivatives strategy is easy to do and a common, cost-effective practice. One use of the replication concept is in the creation of synthetic index funds. The author presents ...

Ethical Decision Making: More Needed Than Good Intentions

cfapubs@cfainstitute.org (Robert A. Prentice) — Thu, 01 May 2008 13:59:13 GMT

CFA Digest May 2008, Vol. 38, No. 2: 94-95.
The flourishing field of behavioral finance indicates that people often do not engage in optimal decision making when investing. The same cognitive biases and mental heuristics that cause suboptimal investing may also cause people to ...

The Anatomy of Value and Growth Stock Returns

cfapubs@cfainstitute.org (Eugene F. Fama et al) — Thu, 01 May 2008 13:59:15 GMT

CFA Digest May 2008, Vol. 38, No. 2: 96-98.
Average returns on value and growth portfolios are broken into dividends and three sources of capital gain: (1) growth in book equity, primarily from earnings retention, (2) convergence in price-to-book ratios (P/Bs) from mean ...

Behavioral Obstacles in the Annuity Market

cfapubs@cfainstitute.org (Wei-Yin Hu et al) — Thu, 01 May 2008 13:59:09 GMT

CFA Digest May 2008, Vol. 38, No. 2: 99-100.
As Baby Boomers enter retirement, they will look to the investment industry for ways to generate income from accumulated savings. Why most retirees do not purchase longevity insurance in the form of lifetime annuities is a long-...

Long–Short Extensions: How Much Is Enough?

cfapubs@cfainstitute.org (Roger Clarke et al) — Thu, 01 May 2008 13:59:17 GMT

CFA Digest May 2008, Vol. 38, No. 2: 101-102.
Long–short extension strategies, such as 130–30, allow portfolio managers to reduce the implementation inefficiencies associated with the long-only constraint. Ample research using benchmark-specific and time period–specific ...

Emerging Markets

cfapubs@cfainstitute.org (Deborah Kidd) — Thu, 01 May 2008 13:59:22 GMT

CFA Digest May 2008, Vol. 38, No. 2: 103-103.

Hitting or Missing the Retirement Target: Comparing Contribution and Asset Allocation Schemes of Simulated Portfolios

cfapubs@cfainstitute.org (Deborah Kidd) — Thu, 01 May 2008 13:59:22 GMT

CFA Digest May 2008, Vol. 38, No. 2: 104-104.

How the World Achieved Consensus on Monetary Policy

cfapubs@cfainstitute.org (Deborah Kidd) — Thu, 01 May 2008 13:59:09 GMT

CFA Digest May 2008, Vol. 38, No. 2: 105-105.

Instantaneous Credit Risk Correlation

cfapubs@cfainstitute.org (Deborah Kidd) — Thu, 01 May 2008 13:59:16 GMT

CFA Digest May 2008, Vol. 38, No. 2: 106-106.

A Pattern of Regional Differences in the Effects of Monetary Policy

cfapubs@cfainstitute.org (Deborah Kidd) — Thu, 01 May 2008 13:59:12 GMT

CFA Digest May 2008, Vol. 38, No. 2: 107-107.

Private Equity: Boom and Bust?

cfapubs@cfainstitute.org (Deborah Kidd) — Thu, 01 May 2008 13:59:24 GMT

CFA Digest May 2008, Vol. 38, No. 2: 107-108.

Professional Trader Order-Selection and Prior Outcomes

cfapubs@cfainstitute.org (Deborah Kidd) — Thu, 01 May 2008 13:59:14 GMT

CFA Digest May 2008, Vol. 38, No. 2: 108-109.

Statement of the Financial Economists Roundtable on the International Competitiveness of U.S. Capital Markets

cfapubs@cfainstitute.org (Deborah Kidd) — Thu, 01 May 2008 13:59:07 GMT

CFA Digest May 2008, Vol. 38, No. 2: 109-110.

Wake Up and Smell the Coffee! DC Plans Aren’t Working: Here’s How to Fix Them

cfapubs@cfainstitute.org (Deborah Kidd) — Thu, 01 May 2008 13:59:12 GMT

CFA Digest May 2008, Vol. 38, No. 2: 110-111.

Water as the Next Commodity

cfapubs@cfainstitute.org (Deborah Kidd) — Thu, 01 May 2008 13:59:19 GMT

CFA Digest May 2008, Vol. 38, No. 2: 111-111.