Editor’s Letter

We open this issue with a discussion by Smith concerning regression to the mean. He pre-sents the argument that a notorious economic example of this fallacy was exposed more than 80 years ago, yet regression to the mean continues to be overlooked or misinterpreted by economists, even Nobel laureates. Mozes and Rozen provide empirical evidence that the expected earnings growth rate used to value an index is the expected earnings growth rate of the index composed only of companies with positive earnings. Gottesman and Morey examine the relationship between mutual fund governance and the activeness of equity mutual funds, finding evidence that funds with better governance are significantly more active than other funds.

Next, Yang, Han, Molyboga, and Molyboga introduce a new quantitative approach that can be used as a diagnostic tool for measuring the stability of optimal portfolio weights. They report that their technique has practical importance in evaluating the improvements in stability gained by employing various statistical estimators of covariance matrixes without having to perform complex calculations or use numerical simulations. Fong evaluates the long-term returns of high- versus low-beta stocks using bootstrap simulations and suggests that investors are better off with a buy-and-hold strategy consisting of low-beta stocks. Rodríguez compares the daily stock market liquidity of single-listed and cross-listed American Depositary Receipts (ADRs). Chowdhury analyzes a Bitcoin investment from the standpoint of an investor with a diversified portfolio using both in-sample and out-of-sample settings, revealing that optimal portfolios that include only the traditional asset classes appear to have superior performance.

In our special section on smart beta, Thiagarajan, Peebles, Dorji, Han, and Wilson outline the application of a systematic factor approach to fixed income investment/risk management. Winther and Steenstrup construct equity portfolios of active managers that resemble the most widely used risk premiums, encouraging investors to increase the use of smart beta as benchmarks while still obtaining extra performance through active management—a concept they call smart alpha. Sebastian and Attaluri provide 10 insights that focus on the equity strategies that are currently the most commonly used among institutional investors: fundamental and low volatility. We conclude our issue with an article by Alonso and Barnes, who focus on the asset weighting used in smart beta portfolios and show that risk-balancing when building factor exposure portfolios yields the most efficient capture of the factor exposure premium.

As always, we welcome your submissions. Please encourage those you know who have good articles or have made good presentations on trading-related subjects to submit them to us. Submission guidelines are included in this issue. We value your comments and suggestions, so please email us at journals{at}investmentresearch.org.

Brian Bruce

Editor-in-Chief

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