As I’m now entering the fourth module of my 1st year in business school, I’m starting to get into some of my elective classes for investment management.
So far, it has been a lot of academic-focused lessons on efficient markets, betas, CAPM, and factor models…not exactly topics that mesh with trying to outperform the markets by picking undervalued stocks!
I thought I would include a few of the more interesting charts and graphs from the year so far.
Returns on Small vs. Big
Returns on Value vs. Growth
However, if an investor is patient, a willingness to tie up capital for an extended period (hopefully in an undervalued security) could yield above-average results.
Risk Premiums
Source: John R. Graham & Campbell R. Harvey, “The Equity Risk Premium in 2010”
This chart is pulled from a forecast of CFOs on the equity risk premium used in cost of capital calculations.
An initial look at the graph shows that premiums are extremely volatile, which further weakens the validity of a CAPM model.
On the other hand, CFOs demanded a much higher premium (and therefore thought future projects were riskier) in the early part of 2009, right when investors should have been buying.
Could a low risk premium be an indicator for poor stock market performance?
Earnings Surprises
Many short-term focused hedge funds play an earnings game, and it turns out that there is some interesting effects, especially after large earnings surprises.
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