A detailed treatment of aggregation and capital heterogeneity substantially improves the performance of the investment CAPM. Firm-level predicted returns are constructed from firm-level accounting variables and aggregated to the portfolio level to match with portfolio-level stock returns. Working capital forms a separate productive input besides physical capital. The model simultaneously fits the value, momentum, investment, and profitability premiums and partially explains positive stock-fundamental return correlations, the procyclical and short-term dynamics of the momentum and profitability premiums, and the countercyclical and long-term dynamics of the value and investment premiums. However, the model falls short in explaining momentum crashes. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online..

Funds investing in illiquid assets report returns with spurious autocorrelation. Consequently, investors need to unsmooth these funds’ returns when evaluating their risk exposures. We show that funds with similar investments share a common source of spurious autocorrelation not fully resolved by traditional unsmoothing methods and thereby leading to underestimation of systematic risk. Thus, we propose a generalized unsmoothing technique and apply it to hedge funds and private commercial real estate funds. Our method significantly improves the measurement of funds’ risk exposures and risk-adjusted performance, especially for highly illiquid funds. Overall, the average illiquid fund alpha is lower than previously thought.

Most firms deleverage from their historical peak market-leverage (ML) ratios to near-zero ML, while also markedly increasing cash balances to high levels. Among 4, 476 nonfinancial firms with five or more years of post-peak data, median ML is 0.543 at the peak and 0.026 at the later trough, with a six-year median time from peak to trough and with debt repayment and earnings retention accounting for 93.7% of the median peak-to-trough decline in ML. The findings support theories in which firms deleverage to restore ample financial flexibility and are difficult to reconcile with most firms having materially positive leverage targets. Received November 17, 2016; editorial decision November 9, 2017 by Editor David Denis.