The Investment Scientist

Posts Tagged ‘returns

EIA Salesman

Typical Salesman’s Chart for EIA

Financial author Allan Roth once wrote an article called “Investment Trick – Annuity Style” where he asks a rhetorical question, “If the S&P 500’s total return is 12% in a given year, what do you think your equity index annuity (that is supposed to track the S&P 500) would return”?

  1. 10%
  2. 8%
  3. 5.4%
  4. 3.4%

Allan Roth goes on to explain why the correct answer is 3.4%. Boy, was he wrong! Read the rest of this entry »

In 1993, the Journal of Financial Economics published “Common risk factors in the returns of stocks and bonds” by Fama and French. They examined bond returns in particular through the lens of various asset return models.

Let’s look at one of those models: the Fama/French three-factor model. The regression statistics of various bond classes are summarized in the table below:

Bond class 1-5G 6-10G Aaa Aa A Baa <Baa
Alpha 0.72% 0.84% -0.84% -0.85% -0.96% -0.6% -1.32%
Beta 0.1 0.18 0.25 0.25 0.26 0.27 0.34
S -0.06 -0.14 -0.12 -0.11 -0.09 -0.04 0.04
V 0.07 0.08 0.14 0.15 0.16 0.2 0.23

Read the rest of this entry »


Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC.

Twitter: @mzhuang

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