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What the equity risk premium is not...

November 15, 2011 Comments (0)

Today's Financial Times had an article titled "What the equity risk premium tells us today" authored by Jason Voss of the CFA Institute.  I had high hopes for the article, but unfortunately it makes two fundamental errors. 1. The article defines the equity risk premium as the difference between the earnings yield on stocks and the 10 year treasury yield.  The earnings yield on stocks is the inverse of the P/E ratio.  It is designated as E/P. ERP = E/P - 10 year ytm This...

Groupon IPO

November 15, 2011 Comments (0)

Of relevance to my undergraduate students in BUS 420 - Groupon has just conducted its IPO.   We'll be talking in class about issuing securities to the public next week - so pay attention! Here are a few links related to Groupon. Aswath Damodaran has a crack at valuing the stock.  His valuation came in around $14 - somewhat less than the offer price of $20.  He notes that his valuation makes some pretty optimistic assumptions. The actual IPO of Groupon raised $700M....

Treasury considering floating rates notes.

November 15, 2011 Comments (0)

Very interesting.  Yet another thing to cover in the bond lecture!  Of course higher interest rates mean that the Government's liability would increase (As Campbell Harvey of Duke notes in the article), but this is already the case with TIPS, so I would wonder to what degree investors would actually just substitute these new bonds for TIPS. (reposted from financeprofessor)

Bank of America - up to no good.

November 15, 2011 Comments (0)

Bank of America apparently just shifted a huge block of Merrill Lynch derivatives to a bank unit funded by federally insured deposits.   In other words, moral hazard reared its ugly head again and B of A took advantage of the Governments deposit insurance program to placate some counter-parties.  Nice work B of A. In unrelated news, I've transferred all my bill pay stuff from my previously bankrupt bank to the local credit union.  I'll be closing my bank account...

Where are new freshman from?

November 15, 2011 Comments (0)

An interesting web site that shows where freshman at major universities are from.  Link should take you to the NCSU page.

Best month in a decade

November 15, 2011 Comments (0)

Turns out this past October was one of the best months for stocks in a decade.   Popular wisdom holds however that October is usually a bad month for investors.   However, I subscribe to Mark Twain's view of stock investing: "October: This is one of the particularly dangerous months to invest in stocks. Other dangerous months are July, January, September, April, November, May, March, June, December, August and February."

Negative convexity in mortgage bonds

November 15, 2011 Comments (0)

I love it when the real world behaves in just the way that I wrote on the class room white board! Case in point: Mortgage bonds have negative convexity over certain ranges of interest rates.  This means that when rates fall the value of the bond falls instead of increases as would be the case for a typical bond.  The reason for this effect is refinancing by the homeowners whose mortgages make up the cash flows of the bond.  As these homeowners refinance, the amount of promised...

Lionization of small business

November 15, 2011 Comments (0)

Much is made of how small businesses are the main source of job growth in the economy.  Turns out this is not really true.  Start ups create jobs (and also destroy jobs if the fail), but existing small businesses as a group don't contribute that much to the overall jobs picture.  As usual, my favorite finance blogger, Felix Salmon has the scoop.

Dropbox

November 15, 2011 Comments (0)

Finance Professor raves about Dropbox - a great product and a very successful company that has mastered the freemium model. I am one of the 4% paying customers - $100 per year to have all (I repeat ALL) my work instantly backed up and accessible anywhere is a great value.  I'm also a huge fan of evernote (another freemium service).

Target date funds

November 15, 2011 Comments (0)

Target date funds are good in theory - but in practice they often fall short.  The investor cookbooks blog has a great analysis.