Did you know that the largest three one-day drops ever to have happened in Dow Jones’ history happened in the month of October? On the 19th of October 1987, Dow Jones fell nearly 23%, making that day the worst day in US stock market history. It was followed by the 24th and 29th of October, 1929, when Dow Jones fell… Read more »
Posts Categorized: Economics & Markets
According to Nobel Laureate Eugene Fama,there are three major risk premiums.
1. Equity premium is the additional “wage” one can earn from taking stock market risk over not taking stock market risk.
2. Small cap premium is the additional “wage” one can earn from taking small company risk over taking large company risk.
In the arena of academic finance, the debate overwhether a rebalancing “bonus” exists or not hasbecome somewhat of areligion!
Those who are ardentbelievers of an efficient market such as Nobel Prize winner Eugene Famausually believe all returnsshould be the result of taking risk and that simple actions like rebalancing periodically should not produce additional returns.
Since its inception on March 9, 2003, RSP has returned 193%. At the same time, SPY has only returned 97%. This is extremely puzzling as both RSP and SPY hold the same S&P 500 stocks.The only difference is that SPY is a cap-weighted fund and RSP is an equally-weighted one. This begs the question, is RSP’s outperformance normal; and more importantly, is it likely to continue?
To answer the question I asked my intern Nahae Kim to run a regression based on the