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  2. ASSA Annual Meeting
  3. 2027
  4. Preliminary Program
  5. Portfolio Choice - Skill, Scale and Constraints
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Portfolio Choice - Skill, Scale and Constraints

Paper Session

Sunday, Jan. 3, 2027 8:00 AM - 10:00 AM (EST)

Westin DC Downtown
Hosted By: American Finance Association
  • Chair: Richard Evans, University of Virginia

The Real Cost of Benchmarking

Christian Kontz
,
University of Notre Dame
Sebastian Hanson
,
Citadel LLC

Abstract

Benchmark-linked capital flows increase firms' CAPM βs, thereby raising managers' perceived cost of equity and reducing investment. Using exogenous variation from Russell and S&P 500 reconstitutions, we show that inclusion in a benchmark stock index increases a stock's CAPM β. Managers interpret the higher β as a higher cost of equity and reduce investment. Consistent with this mechanism, benchmark inclusion also raises the perceived cost of equity among stock analysts and regulators. Industries with larger increases in βs due to benchmarking have accumulated less capital over the past two decades. Benchmark-induced changes in the cross-section of CAPM βs do not cancel out but affect aggregate investment because higher βs fall on many firms with high investment elasticities, while lower βs benefit a few large but inelastic firms.

Surprises in Modern Portfolio Theory

Oliver Hellum
,
Copenhagen Business School
Theis Jensen
,
Yale University
Bryan Kelly
,
Yale University
Semyon Malamud
,
Swiss Federal Institute of Technology Lausanne

Abstract

"The literature has long wrestled with the practical usefulness of Modern Portfolio
Theory (MPT), and extensive evidence shows its performance decreases rapidly with
the number of assets (N ). We present several new and counterintuitive facts about
MPT. Most importantly, the performance of MPT in fact increases with N once the
number of assets exceeds the number of training observations (T ). This finding holds
in a variety of settings: in conjunction with popular portfolio regularization methods,
in a variety of asset universes, and when T is large or small."

The Hidden Cost of Stock Market Concentration: When Funds Hit Regulatory Limits

Lubos Pastor
,
University of Chicago
Taisiya Sikorskaya
,
University of Chicago
Jinrui Wang
,
University of Chicago

Abstract

As stock market concentration has risen, regulatory limits on fund portfolio concentration have become increasingly binding, especially for large-cap growth funds. When funds approach these limits, they trim their largest holdings and reduce equity exposure. Funds perform worse when constrained. A constraint-based ownership measure predicts stock returns, particularly among the largest firms. These findings suggest that high market concentration can distort stock prices by limiting the ability of optimistic investors to scale their positions. Just like short-sale constraints can produce overpricing by limiting pessimistic investors' views, constraints on long positions can generate underpricing by suppressing optimists' views.

Dinner Table Alphas

Sean Cao
,
University of Maryland
Huaizhi Chen
,
University of Texas-Dallas
Lauren Cohen
,
Harvard University
Tianchen (Hugo) Zhao
,
University of Maryland

Abstract

We show that household linkages, formed primarily of spousal employment ties, are important in explaining asset managers’ skills and their portfolio choices. Mutual fund managers with spouses that work at the executive and C-suite levels obtain monthly gross returns of up to 0.32% above asset managers with non-executive spouses. This effect is driven largely by managers’ quarterly stock trades in the industries where their spouses are employed. The spouse-industry stocks bought by executive-spouse-linked managers outperform those bought by the nonexecutive-spouse linked managers by a large and significant 4.30% in the next quarter. Symmetrically, the stocks sold by executive-spouse-linked managers underperform those sold by the nonexecutive-spouse linked managers by a significant -4.33% in the following quarter. These patterns suggest that spousal relationships facilitate fund managers’ comprehension of industry-level information. The linked fund managers’ spouse-industry trades predict subsequent earnings surprises and firm level news. Overall, our results highlight the importance of household links to information production in the asset management industry.

Discussant(s)
Alexander Chinco
,
Michigan State University
Michael Gallmeyer
,
University of Virginia
Clemens Sialm
,
University of Texas-Austin
Veronika Pool
,
Vanderbilt University
JEL Classifications
  • G1 - General Financial Markets