Larry R. Gorman

The Cross-Sectional Dispersion of Stock Returns, Alpha and the Information Ratio

Both the cross-sectional dispersion of U.S. stock returns and the VIX provide forecasts of alpha dispersion across high-performing and low-performing portfolios of stocks that are statistically and economically significant. These findings suggest that absolute return investors can use cross-sectional dispersion and time-series volatility as signals to improve the tactical timing of their alpha-focused strategies. Because active risk increases by a greater amount than alpha, however, high-return-dispersion/high-VIX periods are followed by slightly lower information ratio dispersion. Therefore, relative return investors who keep score in an information ratio framework are unlikely to find return dispersion useful as a signal regarding when to increase or decrease the activeness of their portfolio strategies.

Survey of heavy metal contamination in recycled polyethylene terephthalate used for food packaging

Polyethylene terephthalate food-product containers made with post-consumer materials have been found contaminated with heavy metals due to the recycling and sorting process. The increased use of recycled plastic flake from international suppliers, and subsequent commingling with electronic waste, has been suspected as the source of the increased levels of heavy metal contamination. In this study, nickel, chromium, cadmium, antimony, and lead were quantified in post-consumer polyethylene terephthalate extruded sheet and thermoformed samples, using inductively coupled plasma-atomic emission spectrometry. Recycled polyethylene terephthalate samples were digested using trace-metal grade hydrochloric, perchloric, and nitric acids. Samples were analyzed per ASTM E1613-04, standard test method for determination of lead by inductively coupled plasma atomic emission spectrometry, flame atomic absorption spectrometry, or graphite furnace atomic absorption spectrometry techniques. Two hundred samples were tested of which 29 were found to be contaminated with heavy metals. Chromium and cadmium were found in all 29 sample replicates. Nickel was found in 96.4% of the sample replicates and when it was found, the concentration averaged 11.59 ppm. Lead was found in 90.4% of the sample replicates and the average concentration was 0.15 ppm. Antimony was found in 97.6% of the sample replicates and concentrations were higher in rigid recycled polyethylene terephthalate containers compared to films. It was noted that the total contamination in all 29 samples was well below the threshold level set for the incidental presence of heavy metals in packaging materials as set forth in California’s Toxics in Packaging Prevention Act of 2006. The percentage of each heavy metal that would actually leach from the plastics to contaminate food products during normal processing, packaging, marketing, and consumer use was not determined in this study.

The Ex-Dividend Day Behavior of American Depository Receipts

We compare the ex-dividend day stock returns and trading volume of foreign stocks that trade in U.S. markets as American Depository Receipts (ADRs) with the ex-day returns and volume of a matched sample of U.S. stocks. This experiment allows us to investigate whether differences in the way dividends are paid and/or foreign currency risk affect the stock returns and trading volume of ADRs on the ex-dividend day. If these factors inhibit dividend capture in ADRs, then ADRs should earn larger ex-day returns than U.S. stocks, and their ex-day trading volume should be lower. We present evidence consistent with these hypotheses. The results of a cross-sectional regression analysis of ex-day returns and volume are not consistent with a foreign exchange risk premium suppressing dividend capture in ADRs, however, suggesting that differences in dividend payment policies account for the lower level of dividend capture in ADRs.

Measuring Alpha Based Performance:Implications for Alpha Focused, Structured Products

Portable Alpha, an alpha-focused absolute return product with tremendous potential, has met with somewhat muted demand. Much of the confusion arises from a lack of clear consensus regarding a strict definition of alpha. Inquiries by potential investors are too often met with off the cuff, vague, and inconsistent explanations of the product. One remedy is to improve the clarity of exactly what alpha is, and when it is worth paying for. These ideas should be broadly disseminated. Relative return products such as active portfolio extensions (130/30 funds) pose an additional challenge for Portable Alpha, as they serve as substitute goods. Direct comparisons between Portable Alpha and active extension products have traditionally been difficult to obtain, in large part due to asymmetric performance methodologies in which the information ratio is only computed for active extension products. Reconciling this and other performance measurement issues, and moving to a common assessment methodology in which both absolute and relative return products are assessed via an investor focused information ratio would do much to improve investor demand for both products. The result will likely be a significant increase in collective demand for all professionally managed alpha-focused products.