Top 10 CFA Digest Downloads from 2014 Reflect Investor Ambitions

Each month the editors of CFA Digest sift through hundreds of articles and academic journals to help readers stay abreast of relevant practitioner-oriented research in the field of finance and investments. Only a few articles each month are summarized in CFA Digest. But which are most popular with readers this year?

So far in 2014, the top 10 most popular CFA Digest downloads (on www.cfapubs.org) reflect enduring investor ambitions to improve the way they do their jobs and serve clients, explore new financial innovations and techniques, better interpret the past, and improve understanding of investing practice, especially global investing. Please find below the full list of our top 10 downloadable CFA Digest articles for your education and enjoyment.

1. Asset Allocation in Private Wealth Management: Theory versus Practice

Although wealth advisers are aware of the limitations of traditional asset allocation models and investment concepts, they seldom use the new risk-controlled dynamic asset allocation models or sophisticated theories because of the complexities involved with them. Most wealth managers focus on only portfolio-related risk and ignore client-specific risks.

2. The Recovery Theorem

The recovery theorem (RT) is a tool developed by the author to determine the predictive content of market prices. The RT enables the user to disentangle the future equity return distribution and pricing kernel from option prices, which has been considered impossible using only state prices. Other RT applications include forecasting long-run equity premiums, forecasting the probability of market upheaval, and testing the efficient market hypothesis.

3. Money from Nothing

The use of bitcoin has certainly evolved in the past year, but many still question whether it could qualify as money because it suffers from certain weaknesses that might not allow it to become widely accepted as a hard currency.

4. Is Markowitz Wrong? Investment Lessons from the Financial Crisis

Although Markowitz’s mean–variance portfolio theory has been criticized in the aftermath of the 2008–09 financial crisis, the author believes in its continued relevance to the investment industry. Furthermore, he asserts that Markowitz’s theory is equally consistent with strategic asset allocation and tactical asset allocation theories.

5. Buffett’s Alpha

Warren Buffett is a seminal figure in investing: $1 invested in Berkshire Hathaway, his investment firm, in 1976 would have been worth more than $1,500 in 2011, an astonishing record. The authors examine how Buffett generated sizable alpha over many years to determine what factors might explain his performance success and whether creating a portfolio with similar characteristics and outsized returns is possible.

6. Strategic Asset Allocation in Money Management

To improve the understanding of motivations and tactics in today’s asset management industry, the authors analyze the strategic interaction between two asset managers who are trying to outperform each other to increase their assets under management. Research indicates that fund flows based on relative performance are increasing; thus, a money manager is incentivized to outperform his or her competitors to increase client investor funds and, ultimately, compensation.

7. Is China or India More Financially Open?

Because of the current and potential sizes of China’s and India’s economies, the world has a huge stake in the integration of their financial systems into global markets. The authors use various measures to examine the absolute and relative openness of these two economies. They challenge the popular measures that suggest that China and India restrict capital flows to a similar extent and that rank China as a more open economy than India.

8. Berkshire Hathaway: Playing Out the Last Hand

Warren Buffett has overcome numerous challenges to grow Berkshire Hathaway into America’s fifth most valuable public company. One of the biggest challenges his company will face over the coming years is the transition to new management.

9. Risk Premium, Variance Premium, and the Maturity Structure of Uncertainty

To identify volatilities and other risk factors corresponding to specific option maturities, the authors apply a term structure of risk methodology to decompose option prices. Their findings demonstrate that the term structure of risk implicit in option prices reveals two predictors of the bond, equity, and variance premiums.

10. Liquidity in the Foreign Exchange Market: Measurement, Commonality, and Risk Premiums

Using intraday data, the authors demonstrate that contrary to widely held perceptions about the liquidity of the foreign exchange market, the market could actually be extremely illiquid. Furthermore, they find a strong commonality in liquidity trends across various currencies, with equity and bond markets limiting the diversification potential. As for carry trade returns, it is possible that this liquidity risk is to some extent priced into their returns.

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

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