True. The equity premium may also be called the equity risk premium or market excess returns. It is defined as the additional compensation investing in the stock market provides over a risk-free rate, which is often taken to be the Treasury Bill.

False. There is ample evidence that the equity premium changes throughout the business cycle. It is high in troughs and low in peaks. A non-constant equity premium gives rise to the possibility of changing one’s portfolio based on its prevailing value.

False. There is a debate among academics on whether returns are predictable. For example, Cochrane (2008) offers a convincing argument in favor of predictability whereas Goyal and Welch (2008) provide a strong argument against it.

True! In a 1980 paper, Merton expressed strong opinion against the possibility of good equity premium estimates. However, since then much academic work has demonstrated it is possible to obtain good estimates.

True. Faber (2007) proposes buy and sell rules based on the relative levels of the current price to the past 10-month average. He finds if the current price level exceeds the average, future market returns are expected to be high.

False. Jones and Tuzel (2012) find that a high ratio of new orders to shipments of durable goods is associated with business cycle peaks and forecast lower excess returns.

True. In our paper “A Practitioner’s Defense of Return Predictability”, we illustrate how an investor could implement market-timing strategies based on good return forecasts.

False. We can QUADRUPLE the Sharpe ratio of buy-and-hold. Our simulated market-timing strategy earned twice the annualized returns as buy-and-hold, with half of the volatility.

True. Our research paper uses 20 variables from the academic literature on return predictability.

False. We refit our model every 20 days. On each refit, a predictor may or may not be included depending the strength of its signal. Including only the strongest predictors each time gives superior results compared to including all of the variables.

False. When the signal is strong enough, we will use leverage go long more than 100%.

True. Because we change positions frequently, we may realize short-term capital gains that are taxed at a high rate compared to long-term gains. As such, this strategy would fit better in 401K, IRA, or foundation accounts.

False. The max drawdown of the market-timing strategy is less than half that of the buy-and-hold in our sample from 2001 to 2015.

True. Although market-timing performs better in the long run, in the short run it can underperform. From 2003 to 2006, buy-and-hold beat market-timing each year.

True. Since the market-timing strategy could underperform in the short run, the investor must stay disciplined and believe in the model in order to reap the benefits in the long run.

False. It takes a team of dedicated researchers and traders to set up and implement a market-timing strategy. The paper serves as a simple illustration of how to carry out such a strategy. Our approach for the ETF is more sophisticated and has been refined over several years.

True. Market-timing has a “contrarian” spirit. It prescribes for investors to sell when prices are high and expected returns are low, and to buy when prices are low and expected returns are high. Such trading behavior tends to reduce market volatility and stabilize prices.