Chicken Little Gets it Wrong Again

Posted: 21 May 2019

See all articles by Anna Agapova

Anna Agapova

Florida Atlantic University

Robert Ferguson

AnswersToGo

Dean Leistikow

Fordham University - Finance Area

Date Written: April 30, 2014

Abstract

An acorn fell on Chicken Little’s head, and he concluded that the sky was falling. Stocks’ return correlations have moved toward one at times, and current day Chicken Littles have concluded that, when this happens, alpha opportunities are diminished. Both conclusions make about the same amount of sense. The Chicken Little argument, that alpha opportunities diminish in high-return correlation environments, boils down to the assertion that, if all correlations are close to one, then stocks move in unison and there is little opportunity to exploit relative returns, because they have largely disappeared. By themselves, however, correlations close to one do not imply relative-return scarcity, particularly the kind that alpha seekers try to capture.

Keywords: alpha, active management, high correlation

JEL Classification: G11

Suggested Citation

Agapova, Anna and Ferguson, Robert and Leistikow, Dean, Chicken Little Gets it Wrong Again (April 30, 2014). Journal of Portfolio Management, Vol. 40, Spring 2014; Fordham University Schools of Business Research Paper No. 2694861; https://doi.org/10.3905/jpm.2014.40.3.077. Available at SSRN: https://ssrn.com/abstract=2694861

Anna Agapova

Florida Atlantic University ( email )

Finance Department
777 Glades Rd
Boca Raton, FL 33431
United States
561-297-3493 (Phone)

Robert Ferguson

AnswersToGo ( email )

6815 Edgewater Drve
Apt 208
Coral Gables, FL FL 33133
United States
7868974573 (Phone)

Dean Leistikow (Contact Author)

Fordham University - Finance Area ( email )

33 West 60th Street
New York, NY 10023
United States

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