Practical Applications of Chicken Little Gets It Wrong Again

Abstract

Investors who think the sky is falling whenever they encounter high return-correlation environments are victims of a nearly superstitious belief that active management cannot work in these environments.

The authors of Chicken Little Gets It Wrong Again say that passive investing isn’t the answer, and that investors who fire talented managers based on this false premise hurt themselves needlessly.

According to co-authors Robert Ferguson, Anna Agapova and Dean Leistikow , high correlation does not mean low relative volatility. “Our theory and empirical results can be used by investors and managers to educate and calm pension fund boards and other decision makers, so that they make better decisions and do not needlessly forego superior performance,” explains Ferguson, a Consultant in Coral Gables, Florida.

Agapova is an Associate Professor of Finance at Florida Atlantic University in Boca Raton, and Dean Leistikow is Professor of Finance at Fordham University in New York.

TOPICS: Manager selection, portfolio theory, statistical methods