Leverage in the risk allocation of an investment portfolio can be an effective strategy in achieving overall portfolio goals. While the literature on portfolio leverage is robust, quantifying the amount and discussion of its limitations are often minimized. This article focuses on the limitations by explicitly including the volatility drag from leveraging the expected portfolio returns. Maximizing the expected portfolio returns with respect to leverage results in a return-maximizing condition that balances the gains from leverage with the losses in the volatility drag. The return-maximizing condition is graphically illustrated over a range of investment returns to produce a return-maximizing leverage curve.
{"title":"Determining the return-maximizing portfolio leverage and its limitations","authors":"Robert Ott, Timothy Zimmer","doi":"10.61190/fsr.v25i4.3287","DOIUrl":"https://doi.org/10.61190/fsr.v25i4.3287","url":null,"abstract":"Leverage in the risk allocation of an investment portfolio can be an effective strategy in achieving overall portfolio goals. While the literature on portfolio leverage is robust, quantifying the amount and discussion of its limitations are often minimized. This article focuses on the limitations by explicitly including the volatility drag from leveraging the expected portfolio returns. Maximizing the expected portfolio returns with respect to leverage results in a return-maximizing condition that balances the gains from leverage with the losses in the volatility drag. The return-maximizing condition is graphically illustrated over a range of investment returns to produce a return-maximizing leverage curve.","PeriodicalId":100530,"journal":{"name":"Financial Services Review","volume":"1164 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2023-10-15","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"136185012","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We provide a brief explanation of the new Financial Accounting Standards Board (FASB) standard requiring firms to move their off-balance sheet operating leases onto the balance sheet beginning in 2019, and then discuss how the new rule might affect the stock and bond values in the largest 1,000 listed firms. In short, despite dramatic increases in on-balance sheet liabilities in several industries, wecaution investors not to anticipate changes in their stock or bond valuations resulting from this change. Because asset values change in response to new information, and the information we present in this article regarding changes in total assets and debt ratios is currently available in the notes to the financial statements and from data providers such as Bloomberg, it is already being used byprofessionals to forecast asset values.
{"title":"impact of the capitalization of operating leases","authors":"Jack Trifts, Gary Porter","doi":"10.61190/fsr.v26i2.3308","DOIUrl":"https://doi.org/10.61190/fsr.v26i2.3308","url":null,"abstract":"We provide a brief explanation of the new Financial Accounting Standards Board (FASB) standard requiring firms to move their off-balance sheet operating leases onto the balance sheet beginning in 2019, and then discuss how the new rule might affect the stock and bond values in the largest 1,000 listed firms. In short, despite dramatic increases in on-balance sheet liabilities in several industries, wecaution investors not to anticipate changes in their stock or bond valuations resulting from this change. Because asset values change in response to new information, and the information we present in this article regarding changes in total assets and debt ratios is currently available in the notes to the financial statements and from data providers such as Bloomberg, it is already being used byprofessionals to forecast asset values.","PeriodicalId":100530,"journal":{"name":"Financial Services Review","volume":"12 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2023-10-15","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"136184797","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper assimilates the knowledge and evidence on target-date mutual funds (TDFs). It begins with a discussion of the environment that contributes to the tremendous growth of TDFs. Next, a survey of the theory and recommendations on glide paths indicates a trend towards focusing on meeting retirement liabilities, rather than optimizing asset only portfolios. A review of performance evaluation metrics for TDFs shows that none of the available indexes possesses all seven characteristics of an ideal benchmark. Plan sponsors can provide better outcomes by offering multiple risk profile TDFs while researchers can focus on improving glide path and benchmark design.
{"title":"The evidence on target-date mutual funds","authors":"Sandeep Singh","doi":"10.61190/fsr.v25i3.3223","DOIUrl":"https://doi.org/10.61190/fsr.v25i3.3223","url":null,"abstract":"This paper assimilates the knowledge and evidence on target-date mutual funds (TDFs). It begins with a discussion of the environment that contributes to the tremendous growth of TDFs. Next, a survey of the theory and recommendations on glide paths indicates a trend towards focusing on meeting retirement liabilities, rather than optimizing asset only portfolios. A review of performance evaluation metrics for TDFs shows that none of the available indexes possesses all seven characteristics of an ideal benchmark. Plan sponsors can provide better outcomes by offering multiple risk profile TDFs while researchers can focus on improving glide path and benchmark design.","PeriodicalId":100530,"journal":{"name":"Financial Services Review","volume":"1164 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2023-10-15","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"136185168","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Using the 2012 National Financial Capability Study we determine what demographic characteristics are associated with individuals that use financial advisers and whether financial advisers have any impact on the financial literacy of their clients. We consider five types of financial advisers: Debt Counselors, Savings or Investment, Mortgage or Loan, Insurance, and Tax Planning. We find a significant increase in the use of financial advisers over the past decade. We also find that Savings or Investments advisers have the largest positive impact on the financial literacy of their clients, followed by Mortgage or Loan and Insurance advisers, even when controlling for financial education and potential endogeneity issues.
{"title":"Financial adviser users and financial literacy","authors":"Bhanu Balasubramnian, Eric Brisker","doi":"10.61190/fsr.v25i2.3217","DOIUrl":"https://doi.org/10.61190/fsr.v25i2.3217","url":null,"abstract":"Using the 2012 National Financial Capability Study we determine what demographic characteristics are associated with individuals that use financial advisers and whether financial advisers have any impact on the financial literacy of their clients. We consider five types of financial advisers: Debt Counselors, Savings or Investment, Mortgage or Loan, Insurance, and Tax Planning. We find a significant increase in the use of financial advisers over the past decade. We also find that Savings or Investments advisers have the largest positive impact on the financial literacy of their clients, followed by Mortgage or Loan and Insurance advisers, even when controlling for financial education and potential endogeneity issues.","PeriodicalId":100530,"journal":{"name":"Financial Services Review","volume":"42 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2023-10-15","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"136183475","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Stuart Heckman, Martin Seay, Kyoung Tae Kim, Jodi Letkiewicz
Using the Certified Financial Planner (CFP) Board’s definition of financial planning, this article evaluates the validity of the measures of financial planner use in publicly available datasets. A review of Financial Services Review, Journal of Personal Finance, Journal of Financial Planning, Journal of Family and Economic Issues, Journal of Consumer Affairs, and Journal of Financial Counseling and Planning identified seven datasets that were commonly used to investigate financial planner use. Of these, the two most promising measures were found in the Survey of Consumer Finances and the National Longitudinal Study of Youth (1979). However, an evaluation of these measures raises significant concerns related to their validity. This article critically evaluates these measures and provides insights into the development of better measures of financial planner use for the future.
{"title":"Household use of financial planners","authors":"Stuart Heckman, Martin Seay, Kyoung Tae Kim, Jodi Letkiewicz","doi":"10.61190/fsr.v25i4.3288","DOIUrl":"https://doi.org/10.61190/fsr.v25i4.3288","url":null,"abstract":"Using the Certified Financial Planner (CFP) Board’s definition of financial planning, this article evaluates the validity of the measures of financial planner use in publicly available datasets. A review of Financial Services Review, Journal of Personal Finance, Journal of Financial Planning, Journal of Family and Economic Issues, Journal of Consumer Affairs, and Journal of Financial Counseling and Planning identified seven datasets that were commonly used to investigate financial planner use. Of these, the two most promising measures were found in the Survey of Consumer Finances and the National Longitudinal Study of Youth (1979). However, an evaluation of these measures raises significant concerns related to their validity. This article critically evaluates these measures and provides insights into the development of better measures of financial planner use for the future.","PeriodicalId":100530,"journal":{"name":"Financial Services Review","volume":"179 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2023-10-15","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"136183477","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This article proposes the tax liquidation hypothesis, a predictable pattern of behavior regarding individuals’ decisions to create and subsequently to liquidate “Cash Holding” accounts when facing tax liabilities. Previous research on tax related trading has focused on minimizing the individual tax burden by holding winners and selling losers. This behavior, described as “optimal tax trading” suggests that individuals should sell stocks that have lost value in the short-term while holding onto stocks that have gained value until the stocks can be sold at the preferential long-term capital gains rate. This article proposes the tax liquidation hypothesis based on investor behavioral biases and the current tax environment. Individual investors will hold “cash” accounts that are consistent with their preferences for risk and return. The cash account holdings may differ across individuals, but the pattern and hypotheses regarding formation and liquidation of these accounts for tax reasons should be consistent with the model proposed by this article.
{"title":"The behavior heuristics responsible for formation and liquidation of tax holding accounts","authors":"Matt Hurst, Monica Mendoza","doi":"10.61190/fsr.v25i3.3280","DOIUrl":"https://doi.org/10.61190/fsr.v25i3.3280","url":null,"abstract":"This article proposes the tax liquidation hypothesis, a predictable pattern of behavior regarding individuals’ decisions to create and subsequently to liquidate “Cash Holding” accounts when facing tax liabilities. Previous research on tax related trading has focused on minimizing the individual tax burden by holding winners and selling losers. This behavior, described as “optimal tax trading” suggests that individuals should sell stocks that have lost value in the short-term while holding onto stocks that have gained value until the stocks can be sold at the preferential long-term capital gains rate. This article proposes the tax liquidation hypothesis based on investor behavioral biases and the current tax environment. Individual investors will hold “cash” accounts that are consistent with their preferences for risk and return. The cash account holdings may differ across individuals, but the pattern and hypotheses regarding formation and liquidation of these accounts for tax reasons should be consistent with the model proposed by this article.","PeriodicalId":100530,"journal":{"name":"Financial Services Review","volume":"33 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2023-10-15","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"136185010","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This article develops a measure of complexity of fee disclosures, based on previous work assessing the grade level of language, and validates that measure through a survey where students are asked to independently rate the complexity of fee disclosures. In addition, the article hypothesizes that high fee providers are more likely to engage in strategic complexity in fee disclosures than are low fee providers. We hypothesize that high fee providers use strategic complexity to take advantage of the lack of financial sophistication of many people, making it difficult for them to compare fees across service providers and to understand the level of fees they are paying.
{"title":"Strategic complexity in investment management fee disclosures","authors":"Leslie Muller, John A. Turner","doi":"10.61190/fsr.v25i3.3222","DOIUrl":"https://doi.org/10.61190/fsr.v25i3.3222","url":null,"abstract":"This article develops a measure of complexity of fee disclosures, based on previous work assessing the grade level of language, and validates that measure through a survey where students are asked to independently rate the complexity of fee disclosures. In addition, the article hypothesizes that high fee providers are more likely to engage in strategic complexity in fee disclosures than are low fee providers. We hypothesize that high fee providers use strategic complexity to take advantage of the lack of financial sophistication of many people, making it difficult for them to compare fees across service providers and to understand the level of fees they are paying.","PeriodicalId":100530,"journal":{"name":"Financial Services Review","volume":"5 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2023-10-15","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"136185014","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This study uses a Canadian survey to examine the decisions to seek professional financial planning help. We find that people who use a financial planner have more wealth, lower subjective financial stress, and higher financial self-efficacy than people who do not use a financial planner. Using the longitudinal design of the survey we find that people with higher self-efficacy in period t-1 are more likely to seek help in period t, leading to the conclusion that high self-efficacy drives one to seek financial planning help. We do not find that subjective financial stress leads one to seek financial planning help. Implications for practitioners, consumers, and policy makers are discussed.
{"title":"Behavioral and wealth considerations for seeking professional financial planning help","authors":"Jodi Letkiewicz, Chris Robinson, Dale Domian","doi":"10.61190/fsr.v25i2.3213","DOIUrl":"https://doi.org/10.61190/fsr.v25i2.3213","url":null,"abstract":"This study uses a Canadian survey to examine the decisions to seek professional financial planning help. We find that people who use a financial planner have more wealth, lower subjective financial stress, and higher financial self-efficacy than people who do not use a financial planner. Using the longitudinal design of the survey we find that people with higher self-efficacy in period t-1 are more likely to seek help in period t, leading to the conclusion that high self-efficacy drives one to seek financial planning help. We do not find that subjective financial stress leads one to seek financial planning help. Implications for practitioners, consumers, and policy makers are discussed.","PeriodicalId":100530,"journal":{"name":"Financial Services Review","volume":"268 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2023-10-15","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"136183694","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This study investigates demand for investing in financial literacy while in college using survey responses from a cross-section of students at a medium-size, private university. Results indicate that student interest in personal finance education is largely a function of perceived return, time cost, financial independence, and gender where female students have relatively more interest. Income, patience in consumption, credit experience, numerical ability, and other factors are not consistently significant to demand. The results support offering learning opportunities for individual personal finance topics in addition to a personal finance course.
{"title":"College student interest in personal finance education","authors":"Christine Harrington, Walter Smith","doi":"10.61190/fsr.v25i4.3227","DOIUrl":"https://doi.org/10.61190/fsr.v25i4.3227","url":null,"abstract":"This study investigates demand for investing in financial literacy while in college using survey responses from a cross-section of students at a medium-size, private university. Results indicate that student interest in personal finance education is largely a function of perceived return, time cost, financial independence, and gender where female students have relatively more interest. Income, patience in consumption, credit experience, numerical ability, and other factors are not consistently significant to demand. The results support offering learning opportunities for individual personal finance topics in addition to a personal finance course.","PeriodicalId":100530,"journal":{"name":"Financial Services Review","volume":"12 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2023-10-15","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"136183495","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Catastrophe bonds, a relatively new entry into the bond market, are a form of reinsurance in which insurance firms are able to offset the financial risks from both natural and man-made catastrophes. Although the primary offset is within the reinsurance market, starting in the 1990s insurance firms started using the financial markets to offset catastrophe risks. Anecdotal evidence shows that the entry of CAT bonds made the reinsurance market more efficient and allowed investors an opportunity to participate in what has been a very profitable investment opportunity. Our analysis shows that on average, CAT bonds have generated high returns but with the advantage of diversification when compared with similarly rated corporate debt. Thus, CAT bonds are a viable investment option withina diversified portfolio.
{"title":"Catastrophe (CAT) bonds:","authors":"Richard Kish","doi":"10.61190/fsr.v25i3.3281","DOIUrl":"https://doi.org/10.61190/fsr.v25i3.3281","url":null,"abstract":"Catastrophe bonds, a relatively new entry into the bond market, are a form of reinsurance in which insurance firms are able to offset the financial risks from both natural and man-made catastrophes. Although the primary offset is within the reinsurance market, starting in the 1990s insurance firms started using the financial markets to offset catastrophe risks. Anecdotal evidence shows that the entry of CAT bonds made the reinsurance market more efficient and allowed investors an opportunity to participate in what has been a very profitable investment opportunity. Our analysis shows that on average, CAT bonds have generated high returns but with the advantage of diversification when compared with similarly rated corporate debt. Thus, CAT bonds are a viable investment option withina diversified portfolio.","PeriodicalId":100530,"journal":{"name":"Financial Services Review","volume":"20 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2023-10-15","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"136183476","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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