Editor’s Letter

To open this issue, Hight and Haley use expected shortfall to measure risk, bootstrapping to transform fat-tailed distributions so they are suitable for t-tests, and factor analysis to help explain the relative performance of the models. The outcome suggests many rebalancing models—perhaps even return-based models—could produce superior risk-adjusted returns if lower risk benchmarks constrain risk. Next, Sherwood introduces a portfolio construction framework for risk-averse investors that aim to meet, or exceed, an individual’s capital accumulation needs for a future event, such as retirement. Risk Capacity Portfolio Construction factors skewness and kurtosis into the risk management and asset allocation of an individual’s life cycle. It can optimize risk beyond simply accounting for the equity risk premium and human capital.

Dyachenko, Farkas, and Rieger construct a derivative that depends on the SPY and VIX and, in this way, incorporates both the market risk premium and the variance risk premium. Jovellanos demonstrates how investment managers can identify and resolve suboptimal operational workflows that diminish an investment strategy’s attainable alpha. Graph modeling techniques are used to identify and resolve information workflow inefficiencies that occur both within and external to the investment firm.

As we continue, Ozocak examines the informational role of trading around the announcement of 8:30 a.m. economic news in the US Treasury market and investigates whether there is speculative trading before the US news release in the US and London markets. Klevak, Livnat, Pei, and Suslava examine a comprehensive sample of initial CAM disclosures in the 10-K filings for August 2019-May 2020. They find that a larger number of CAMs, a greater number of required auditing procedures, and more wordy and extensive CAM discussions are negatively associated with stock returns immediately following the 10-K filings. They also document significantly more negative analyst earnings revisions for firms whose auditors report more CAMs and provide more verbose CAM disclosures.

To conclude the issue, Frankfurter presents a commentary on understanding dividends.

As always, we welcome your submissions. We value your comments and suggestions, so please email us at journals{at}investmentresearch.org.

TOPICS: Portfolio construction, portfolio theory, wealth management, retirement

Brian Bruce

Editor-in-Chief

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