The authors investigate whether the ratio of book value to market value serves as a suitable risk measure when using a leverage-based model instead of traditional asset-pricing models. They believe the book-to-market ratio should measure risk because it affects the relationship between financial risk and capital structure. For the base sample composed of companies with positive book values, the authors find that the book-to-market ratio (B/M) not only has the same explanatory power for average returns as financial leverage but also contains some small additional amount of risk information. They find no relationship between average returns and B/M for all-equity-financed companies but an inverse relationship for companies with negative book value of equity.

The paper seeks to determine whether Taiwanese investors exhibit behavioral investing patterns consistent with overconfidence. It finds that trading volume increases following bullish market moves, consistent with the theory. The paper also points to modest shifts toward riskier stocks following bullish moves.

Although it is the centerpiece of modern finance, the capital asset pricing model (CAPM) poorly explains cross-sectional U.S. and U.K. stock returns. By extending the standard CAPM beyond its traditional mean–variance framework to include skewness and kurtosis, U.K. stock return predictability can be improved, though this result could be specious, owing to excessive use of model parameters.

The author proposes an asset/liability model to predict the optimal allocation of a pension plan to both privately held and publicly listed real estate. This model includes the impact of such variables as the funding status of the plan, the industry of the plan's sponsor, and the covariance of real estate returns with changes in plan liabilities. The resulting allocations to real estate—which are subdivided by industry and adjusted by funding status—are lower in absolute terms than most traditional mean–variance models suggest and are also closer to empirically observed plan allocations to real estate.

Current macroeconomic factors as well as recent academic studies support treating commodities as an asset class. Passive index investing in commodities may be difficult because major indices differ considerably and suffer from inherent limitations. The author presents a benchmark index of active commodity futures investors and another including hedfe fund commodity investors. Both active indices outperform passive indexing.

Editor's Comments, CFA Digest, May 2006