farrelly's is often asked to write papers and articles. If non-subscribers have the benefit of these, farrelly's subscribers should too - below are links to each.  In addition, you can access pivotal academic papers are sourced in the Investment Strategy Handbook Guide and provide much of the theoretical foundation to the farrelly's approach.

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Articles

Crockpot: History is all we have to go by
by Tim Farrelly | 1 June 2007 |
Many planners still use long-term historical returns to estimate future market returns on the basis that, if the historical period is long enough, everything smoothes out. This is pure bunk. In order to demonstrate this as conclusively as possible, we illustrate the impact of using 20 year historical returns as forecasts for the subsequent decade across six major equity markets over the past 107 years... Full article >

Crockpot: The bubble of the decade
by Tim Farrelly | 1 March 2007 |
Towards the end of every decade, a new bubble seems to emerge in the financial markets. It normally starts out plausibly, and gets a head of steam, before running to ridiculous levels – and then running some more, before crashing back to earth. We may not have to wait too much longer for this decade’s instalment... Full article >

Asset allocation for robust portfolios
by Tim Farrelly | March 2004 |
A new risk return optimisation model is described that overcomes much of the instability inherent in mean variance optimisers, with minimal sacrifice of efficiency. The robust frontier model identifies portfolios that are close to the efficient frontier, but which are less likely to produce extreme results and, most importantly, are much more stable to changes in input assumptions. Practitioners using this model can approach the task of asset allocation with confidence that small errors in forecasts will not be the primary driver of asset allocation outputs and that, if the model is used over time, it will not produce huge swings in allocations with consequent high transaction costs...
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Academic papers

Towards a better measure of risk
by Tim Farrelly | Originally published in PortfolioConstruction Journal | Spring 2004 |
Investors face many risks, some of them easily quantifiable, others not. This paper proposes an overarching, client-centric risk measurement and management framework than can be used by asset consultants and financial advisers to identify and manage the various sources of risk faced by investors. It proposes that it is often best to focus on a primary measure of risk to use in a particular application, and that for many personal investors, that risk should be the uncertainty of real, long-term returns...
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Behavioral finance
by J Ritter | Originally published by Pacific-Basin Finance Journal | Sep 2003 |
This article provides a brief introduction to behavioral finance. Behavioral finance encompasses research that drops the traditional assumptions of expected utility maximisation with rational investors in efficient markets. The two building blocks of behavioral finance are cognitive psychology (how people think) and the limits to arbitrage (when markets will be inefficient). The growth of behavioral finance research has been fuelled by the inability of the traditional framework to explain many empirical patterns, including stock market bubbles in Japan, Taiwan, and the US...
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The limits of arbitrage
by A Shleifer & R Vishny | Originally published by The Journal of Finance | March 1997 |
Textbook arbitrage in financial markets requires no capital and entails no risk. In reality, almost all arbitrage requires capital and is typically risky. Moreover, professional arbitrage is conducted by a relatively small number of highly specialised investors using other people's capital. Such professional arbitrage has a number of interesting implications for security pricing, including the possibility that arbitrage becomes ineffective in extreme circumstances, when prices diverge far from fundamental values. The model also suggests where anomalies in financial markets are likely to appear, and why arbitrage fails to eliminate them...
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Investing in the 1990s: Occam's Razor Revisited
by J Bogel | Originally published in The Journal of Portfolio Management | Fall 1991 |
My article in the Spring 1991 Journal of Portfolio Management evaluates the contributions made to the historical ten-year rates of total return achieved by common stocks in terms of three major components: 1) dividend yield at the beginning of each period; 2) earnings growth rate for each period; and 3) impact on return of the change in the price/earnings multiple during each period (Bogle [1991])...
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Earnings growth: The two percent dilution
by W Bernstein & R Arnott | Originally published by AIMR | Sep/Oct 2003 |
My article in the Spring 1991 Journal of Portfolio Management evaluates the contributions made to the historical ten-year rates of total return achieved by common stocks in terms of three major components: 1) dividend yield at the beginning of each period; 2) earnings growth rate for each period; and 3) impact on return of the change in the price/earnings multiple during each period (Bogle [1991])...
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The equity premium
by E Fama & K French | Originally published by University of Chicago | April 2001 |
Our estimates for 1951-2000, 2.55% and 4.32%, are much lower than the equity premium produced by the average stock return, 7.43%. Our evidence suggests that the high average return for 1951-2000 is due to a decline in discount rates that produces large unexpected capital gains. Our main conclusion is that the stock return of the last half-century is a lot higher than expected...
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Hedge funds: A walk through the graveyard
by Ross Barry | Originally published by Macquarie University | March 2003 |
Prior research has identified a number of biases in hedge fund databases, notably due to survivorship and selective backfilling of returns. This study finds that survivorship bias in hedge funds has risen in recent years to almost 4% pa, due mainly to higher attrition among managed futures, fixed income arbitrage and some equity hedge (technology) funds, although prior estimates of ‘instant history’ bias however, are greatly exaggerated...
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Private equity performance
by S Kaplan & A Schoar | Originally published by MIT School of Mgmt | April 2001 |
This paper investigates the performance of private equity partnerships using a data set of individual fund returns collected by Venture Economics. Over the sample period, average fund returns net of fees approximately equal the S&P 500 although there is a large degree of heterogeneity among fund returns. Returns persist strongly across funds raised by individual private equity partnerships. The returns also improve with partnership experience. Better performing funds are more likely to raise follow-on funds and raise larger funds than funds that perform poorly. This relationship is concave so that top performing funds do not grow proportionally as much as the average fund in the market. At the industry level, we show that market entry in the private equity industry is cyclical. Funds (and partnerships) started in boom times are less likely to raise follow-on funds, suggesting that these funds subsequently perform worse. Aggregate industry returns are lower following a boom, but most of this effect is driven by the poor performance of new entrants, while the returns of established funds are much less affected by these industry cycles. Several of these results differ markedly from those for mutual funds...
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