What is Wrong with this Picture? A Problem with Comparative Return Plots on Finance Websites and a Bias Against Income-Generating Assets

“What is Wrong with this Picture? A Problem with Comparative Return Plots on Finance Websites and a Bias against Income Generating Assets”, Pankaj Agrrawal * and Richard Borgman, Journal of Behavioral Finance, Vol. 11(4), Winter 2010, pp. 195-210.

Posted: 3 Aug 2015 Last revised: 12 Nov 2017

Date Written: 2010

Abstract

This paper brings to light and discusses a systemic issue in the calculation and display of relative return information as currently seen on some of the most prominent finance websites; income-generating events such as dividends and interest are not included in relative return calculations and all comparative return graphics. The resulting ranking of the securities, based on such incomplete returns, is essentially meaningless from a total return perspective, yet they are being served to millions of investors every day. This could lead to the formation of a possible availability heuristic and an optical bias against fixed-income and other income generating assets. This problem has gone unnoticed for many years with no discussion of the topic either in the academic or practitioner press. The ready availability of such unclear or inaccurate information from sources generally perceived to be credible can, in this age of do-it-yourself portfolio management, have serious and damaging financial consequences to the unsuspecting investor. The paper also shows the effect of this return differential on the calculation of the asset correlation matrices and the subsequent effect on the resulting asset-weight vectors that are used to generate Markowitz style mean-variance portfolios. The visual discrepancies are then supported by the application of the Gibbons, Ross and Shanken [1989] W-test for portfolio efficiency. The authors’ proposed correction, based on elementary finance, fixes the problem.

Keywords: internet charts, dividend charts, total return with dividends, return finder, correct charts, finance websites problems

JEL Classification: g

Suggested Citation

Agrrawal, Pankaj and Borgman, Richard H, What is Wrong with this Picture? A Problem with Comparative Return Plots on Finance Websites and a Bias Against Income-Generating Assets (2010). “What is Wrong with this Picture? A Problem with Comparative Return Plots on Finance Websites and a Bias against Income Generating Assets”, Pankaj Agrrawal * and Richard Borgman, Journal of Behavioral Finance, Vol. 11(4), Winter 2010, pp. 195-210. , Available at SSRN: https://ssrn.com/abstract=2639013

Pankaj Agrrawal (Contact Author)

University of Maine ( email )

Orono, ME 04469
United States

Richard H Borgman

University of Maine ( email )

Orono, ME 04469
United States

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