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• Case | HBS Case Collection | January 2015 (Revised October 2018)

  Dogs of the Dow

  Malcolm Baker, Samuel G. Hanson and James Weber

  This case describes the Dogs of the Dow investment strategy, value investing, and using dividend yields as a means to determine intrinsic value. It also describes exchange traded notes and a particular exchange traded note, known as the Dogs of the Dow, which tracks the performance of the 10 highest yielding stocks of the 30 stocks that make up the Dow Jones Industrial Average (DJIA). The case provides share price data, dividend data, and financial statement data on the 30 DJIA companies to enable students to perform their own calculations.

  Keywords: Dow Jones; Dow Jones Industrial Average; Exchange Traded Note; Exchange Traded Fund; value investing; Benjamin Graham; investment strategy; dividend yield; intrinsic value; dividend discount model; Michael O'Higgins; Financial Instruments; Investment; Strategy; Financial Services Industry; United States;

  Citation:

  Baker, Malcolm, Samuel G. Hanson, and James Weber. "Dogs of the Dow." Harvard Business School Case 215-020, January 2015. (Revised October 2018.)  View Details

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• Working Paper | 2018

  Detecting Anomalies: The Relevance and Power of Standard Asset Pricing Tests

  Malcolm Baker, Patrick Luo and Ryan Taliaferro

  The two standard approaches for identifying capital market anomalies are cross-sectional coefficient tests, in the spirit of Fama and MacBeth (1973), and time-series intercept tests, in the spirit of Jensen (1968). A new signal can pass the first test, which we label a “score anomaly,” it can pass the second test as a “factor anomaly,” or it can pass both. We demonstrate the relevance of each to a mean-variance optimizing investor facing simple transaction costs that are constant across stocks. For a risk-neutral investor facing transaction costs, only score anomalies are relevant. For a risk-averse investor facing no transaction costs, only factor anomalies are relevant. In the more general case of risk aversion and transaction costs, both tests matter. In extensions, we derive modified versions of the basic tests that net out anomaly execution costs for situations where the investor faces capital constraints, a multi-period portfolio choice problem, or transaction costs that vary across stocks. Next, we measure the econometric power of the two tests. Time-series factor tests have uniformly lower power than equivalent cross-sectional score tests, with the gap increasing in the in-sample Sharpe ratio of the incumbent factor model. New factor anomalies are successively harder to detect. There is a lower natural limit on the number of anomalies, after which new factors can no longer be verified. Meanwhile, for an investor facing transaction costs, where score anomalies are also applicable, there is a higher natural limit on the number of anomalies that can be statistically validated as relevant.

  Keywords: investment management; asset pricing; anomalies; portfolio construction; transaction costs; Investment; Management; Asset Pricing; Market Transactions; Cost;

  Citation:

  Baker, Malcolm, Patrick Luo, and Ryan Taliaferro. "Detecting Anomalies: The Relevance and Power of Standard Asset Pricing Tests." Working Paper, July 2018.  View Details

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• Case | HBS Case Collection | March 2018 (Revised May 2018)

  Celgene

  Malcolm Baker and Emily McComb

  In February 2011, Adam Koppel, a managing director at Brookside Capital, the public equity arm of Bain Capital, must decide whether to increase or exit the firm’s position in Celgene Corporation. News has emerged that raises potential safety concerns associated with Celgene’s key drug, Revlimid. In response, Celgene’s share price has traded down 20% in the last two months and is now almost 10% below the level where Brookside made its initial investment.

  Keywords: life sciences; biotechnology; public market investing; Celgene; Revlimid; hedge fund; valuation; growth stocks; Valuation; Investment; Decision Choices and Conditions; Analysis; Biotechnology Industry;

  Citation:

  Baker, Malcolm, and Emily McComb. "Celgene." Harvard Business School Case 218-094, March 2018. (Revised May 2018.)  View Details

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