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Long-Short Equity Investing 293 Miller concludes that overvalued stocks are easier to find tha undervalued stocks, and that investors should focus their efforts avoiding holding overvalued stocks in their portfolios. He proposes replacing the standard notion of market efficiency with one of ”bounded efficiency.” In support of bounded efficiency, Jacobs and Levy (1988~~ 1988&, and 1989) find substantial empirical evidence that the stock market is not fully efficient. PRACTICAL BENEFITS OF LONG-SHORT INVESTING Investors who are able to overcome short-selling restrictions and have the flexibility to invest both long and short can benefit from both winners and losers. For example, suppose you expect the Y kees to win their game and the Mets to lose theirs. If you wager on baseball, you would certainly not just bet on the Yankees to win. You would also “short“ the Mets. The same logic holds for stocks. Why bet on winners only? Why avail yourself of only half the opportunity? Profits can be earned from both winning and losing stocks simultaneously, earning the full performance spread. Another benefit of long-short investing is that, potentially, shorts provide greater opportunities than longs. The search un- for dervalued stocks takes place in a crowded field because most tr tional investors look ‘only for undervalued stocks. Because of various short-selling impediments, relatively few investors search for overvalued stocks. Also, security analysts issue far more buy sell than recommendations. Buy recommendations have much more commissiongenerating power than sells, because all customers are potential buyers, but only those customers having current holdings are potential sellers, and short-sellers are few in number. Analysts may also be reluctant to express negative opinions. They need open lines of communication with company management, and in some cases management has cut them off and even threatened libel suits over negative opinions. Analysts have also . been silenced by their own employers to protect their corporate finance business, especially their underwriting relationships. Some analysts have actually been fired for speaking too frankly.
294 Expanding Opportunities F I G U R E 11-2 Payoffs: Long Portfolio Portfolio Retum . Market Retum Shorting opportunities may also arise from management fraud, ”window-dressing” negative information, or negligence, for which no parallel opportunity exists on the long side. PORTFOLIO PAYOFF PAlTERNS Theoretical portfolio payoff patterns are illustrated in Figures 11-2 .to 11-6 for separate long and short portfolios (the two building blocks of long-short portfolios), market-neutral portfolios, equitized portfolios with a permanent futures overlay, and hedge port folios with a variable futures position. In Figure 11-2, a long portfolio’s return is graphed agaht the stock market‘s return. The market portfolio itself is shown as a 45- degree upward-sloped dashed line intersecting origin. the The long portfolio is parallel to the market portfolio line but by higher the assumed amount of value-added, or alpha. . A short portfolio’s return is graphed in Figure 11-3. A baseline short market portfolio is a 45-degree downward-sloped dashed l
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EQUITY MANAGEMENT.
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EQUITY MANAGEMENT Quantitative Anal
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To Ilene, Lauren, Julie, Sam, and E
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CONTENTS Foreword by Harry M. Marko
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Contents ix Chapter 4 Calendar Anom
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Contents xi Implications 272 High-D
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FOREWORD by Harry M. Markowitz, Nob
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Foreword xv In practice, of course,
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Foreword xvii that an RDM would con
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xix
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INTRODUCTION Life on the Leading Ed
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Life on the Leading Edge 3 tion abo
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Life on the Leading Edge 5 clude th
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Life on the Edge Leading 7 stocks t
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Life on the Leading Edge 9 . Quanti
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Life on the Leading Edge 11 By the
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Life on the Leading Edge 13 ple, st
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Life on the Leading Edge 15 find be
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Life on the Leading Edge 17 equal t
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P A R T ONE Selecting Securities A
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Selectine Securities 21 stocks. Suc
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selecting secunties 23 unmoved by s
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CHAPTER 1 The Complexity of the Sto
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The Complexity of the Stock Market
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The Complexity of the St& Market 31
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The Complexity of the St& Market 37
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The of the Complexity Stock Market
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The Comdexitv of the Stock Market 4
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V 7
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Disentangling Equity Return Regular
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Disentangling Equity Rehun Regulari
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Disentangling Equity Rehun Regulari
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64 selecting securities aged 59 bas
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66 selecting Securities FIGURE 2-2
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68 selecting securities FIGURE 2-3
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70 selecting securities tic of 17.8
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72 selecting securities Some Implic
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74 selecting securities Table 2-2 d
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I l
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82 Seleaine Securities these time-s
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84 selecting securities of 9.7. The
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86 selecting securities 2. There ar
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and deferring gains [as per Constan
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90 selecting securities 35. For exa
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92 selecting securities 49. Before
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94 selecting securities Ball, R. 19
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96 selecting securities Iowa, Ames.
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98 Seleaine securities James, W. an
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100 selecting securities Nicholson,
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102 selecting securities Tinic, S.
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104 selecting securities VALUE AND
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106 selecting securities Street Jou
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108 Selectine Securities This is no
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110 selecting securities plaining s
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112
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114 selecting securities transient
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116 selecting securities Na'ive Exp
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118 selecting securities (1988c)l.
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l20 selecting securities average of
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124 selecting securities We have de
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126 selecting securities movements
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l28 selecting securities 34. Pensio
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130 selecting securities Einhom, S.
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132 Selectine securities Poterba, J
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136 selecting securities The availa
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138 selecting securities subsequent
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142 Selectine securities FIGURE 4-2
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144 selecting securities others usi
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146 Selectine Securities FIGURE 4-3
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l48 SelectirlE securities a market
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150 . selecringsecurities There is
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152 selecting securities 1981 and 1
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154 seleding securities Chari,V., R
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156 Selectine securities McNichols,
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160 selecting securities that betwe
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162 selecting securities Handa, Kot
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164 selecting securities risk does
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166 selecting securities returns ac
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168 selecting securities ket return
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~ more 170 Selectine securities tiv
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h h h h W v ) 000000 m N m w r "80q
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~~~ ~ ~~ 174 selecting securities A
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176 selecting securities hibit feed
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178 Seledine securities multivariat
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-2 1982 1983 1984 1985 1986 1987 18
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182 selecting securities rate produ
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184 Seledine Securities 11. Further
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186 Seleaine securities REFERENCES
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188 selecting securities Fama, E. a
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190 selecting securities Miller, E.
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194 Selectine Securities modeling p
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196 selecting securities surement e
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Earnings Estimates, Predictor Speaf
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Earnings Estimates, Predictor Speci
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0 a I "F c2 . 2 0
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216 selecting securities The Return
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U) J U) C Q) U) C S r jo-0 eke I C
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?68% $1-0 I 220
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222 Seleaine Securitiff ings data f
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224 selecting securities 4. The dif
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226 selecting securities 20. Note t
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230 Managing Portfolios have concen
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232 Managing Portfolios portfolios.
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234 Manaeine Portfolios of investme
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236 Managing Portfolios There is, n
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238 Managing Portfolios bound to ig
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240 Managing Portfolios expected to
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Page 339 and 340: 318 Expanding Opportunities the $4.
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344 Expanding Opportunities expecte
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Nonsymmetrical distributions of sec
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11. We assume a futures margin of 4
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350 Expanding Opportunities see, lo
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352 Expanding Opportunities case, t
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Trading Costs Some other costs of l
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356 Expanding Opportunities We use
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358 Expanding The optimal portfolio
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360 Expanding Opportunities N H = C
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362 Expanding Opportunities . Consi
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364 Expanding Opportunities mark se
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366 Expanding Opportunities not be
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370 Expanding Opportunities securit
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372 Expanding Opportunities maximiz
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374 ExpandingOpportunities uity ret
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376 Expanding Opportunities may be
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378 Expanding Opportunities from se
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hance good performance, but they ca
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382 Name Index Clarke, Roger G., 25
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384 Name Index Levis, M., 174,175,1
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386 Name Index Swanson, H., 183,188
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388 Subject Index Disentangling equ
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390 Subied Index MAE, 170,182 Marke
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392 Subiect Jndex Security analysis
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