Capital market expectations involve setting likely risk and return parameters for a portfolio. These expectations inform the asset allocation that is ultimately selected, which is the investment results’ primary driver. Macro expectations involve forecasting risk and returns for an entire…

In a truly efficient market, no new information should lead to the generation of alpha, defined as returns in excess of the market. Markets are not always truly strong-form efficient. Indeed, some anomalies that seem to contradict the efficient market…

Research has shown that making decisions in a group setting does not always yield optimal outcomes. Committees can include but are not limited to the following: Research teams. Analyst collaborations. Board of Trustees. Investment clubs. Issues arise when committees are…

An analyst’s job is to keenly study the firms under their charge to make appropriate recommendations. Often, analysts are considered experts on a particular industry or group of companies. Since their relationships with the market are unique, it stands to…

Behavioral portfolios differ from traditional mean-variance portfolios. Rather than seek the optimal combination of assets that produces the highest risk-adjusted returns and utility to the investor, behavioral portfolios are generally structured in layers. Even though these portfolios are not technically…

A successful client-adviser relationship is characterized by the planning, construction, and selection of the most optimal portfolio for the client. This involves staying the course, bolstered by solid communication between both parties. The first logical step is to have the…

Various biases affect portfolio construction in different ways. The following are some of the common and testable biases and their consequences.  Status quo bias: This bias is characterized by inaction. Investors may choose the asset allocation and contribution rate default…

Advisers are encouraged to include behavioral factors in their clients’ portfolios. This tends to improve adviser-client relationships. In addition, the inclusion of behavioral factors in clients’ portfolios yields portfolios that are closer to the efficient frontier. The following models help…

 Distinguishing between cognitive and emotional bias is not always a binary process. Some biases manifest elements of both cognitive and emotional aspects. Categorizing biases as cognitive or emotional is useful to analysts and advisors in answering the question of…

 Mnemonic Devices for Easy Recall Cognitive: Use the following mnemonic device to remind yourself of cognitive biases: Con-Con-Con-Rep-Hind + FAMA (think Fama and French). Emotional: To remember emotional biases, use the following mnemonic device: LESSOR (the owner of an…