Bad Science
The random-walk model languished in obscurity until Leonard Jimmie Savage rediscovered Bachelier's work in about 1954. Savage, a gifted statistician at the University of Chicago, introduced Bachelier's random-walk model to U.S. academics, including Paul Samuelson. The first American to win the Nobel Prize in Economics, Samuelson was enamored of Bachelier's work and believed in the theory that market prices are the best gauge of intrinsic value. He published a paper in 1965 called Proof That...
figure 74 Tax Treatment of Alternative HedgingMonetization Techniques for Stock
Should carrying costs be currently deductible against investment income 35 benefit If investor implements monetizing collar through When cash settling, if stock price is above call strike, what is the character of the loss If investor implements monetizing collar through Prepaid variable forward Deferred long-term capital loss Prepaid variable forward Deferred long-term capital loss Deferred ordinary deduction or long-term capital loss at investor's discretion When cash settling, if stock price...
Exiting a Stock Investment
The stock market's extreme volatility during the start of the decade caused many investors who hold a single concentrated stock position with a low cost basis to explore strategies to reduce their exposure to the stock. Investors can eliminate or reduce the risk and reward of holding a single stock by Establishing a short against the box position Selling call options and buying put options Entering into an equity swap Entering into a forward contract Entering into a single-stock futures...
figure 33 Approaches to Calculating Sam Smythes Asset Allocation
Asset mix 60 bonds 40 stocks Traditional Approach Asset mix 60 bonds 40 stocks Traditional Approach A partial improvement over the traditional approach A partial improvement over the traditional approach Asset mix 72 bonds 28 stocks After-Tax Extended Approach Asset mix 72 bonds 28 stocks After-Tax Extended Approach The planner estimates the pretax standard deviation and pretax expected return for each asset class, the correlation coefficient between each pair of asset classes, and the client's...
An Alternative Design
Suppose we think instead in terms of barbelling the portfolio. Rather than placing all our eggs in the basket located in the middle of the portfolio-activity spectrum, we divide our portfolio into two strategic baskets, which, as we'll see later, don't need to be the same size. Indeed, the relative sizes of these two extremes of the portfolio will help determine the degree of overall average portfolio activity sought by the investor. The first subportfolio aims to produce the highest possible...
appendix Core and Satellite A Live Example
Evensky, Brown amp Katz has implemented C amp S portfolios for its clients. The following is an example of the policy now implemented for an all-equity allocation. The primary investment vehicles for core allocations are exchange-traded funds for example, the Barclay Russell 3000 iShare for the Broad Domestic Core . In larger taxable portfolios, the firm has directly employed a quant-based tax manager. This appendix is included not as a recommendation but solely as an example of how a C amp S...
Death to the Policy Portfolio
Peter Bernstein caused an uproar in 2003 with his article in Economics and Portfolio Strategy when he proclaimed that policy portfolios are obsolete.1 The policy portfolio is the term Bernstein uses to describe the common practice in financial planning of setting a fixed asset-allocation mix as part of investment policy and avoiding market timing. In challenging the policy portfolio, Bernstein is challenging the core belief that supports it Equilibrium and central values are myths, he says, not...