The road to merger is strewn with fortuitous events, surprises, and disappointments for most firms even under ordinary circumstances, but the airline industry following World War II faced special problems of postwar readjustment, rapid technological change, and government intervention by a Civil Aeronautics Board that was determined to shape the future of American commercial aviation. Congruence with federal regulatory policy was a key element in the success of the merger with which this essay deals.

The Industrial Revolution, the Napoleonic Wars, the American Revolution, and our emergence as an independent trading nation all worked profound changes upon the British marketing enterprise, but it is an oversimplification, according to Dr. Chapman, to conclude that manufacturers quickly or entirely replaced traditional British merchant banking houses even down to World War I. He develops three phases of a long-drawn-out process of change that served Britain's needs poorly throughout the nineteenth century.

The existence of risk aversion in portfolio theory can be explained by positing a concave utility function of wealth. In some cases it is useful to construct some measure of risk aversion rather than merely accept its existence.

According to the current state of knowledge in finance, the expected rate of return adjusted for risk is independent of the stock price. The basic proposition of the capital asset pricing model (CAPM) is that the expected rate of return for each security is a function of the “risk” of that security, and that this risk is measured by the contribution of the security to the variability of the market portfolio. The implication of the CAPM is that knowing the price of a security perse will add nothing to predicting its expected rate of return.

There is a considerable body of empirical research in accounting devoted to the analysis of relationships between accounting numbers and security prices. Very roughly, this body of research may be classified into three different categories: (i) share price valuation models and the determination of market equity values; (ii) the measurement of “unexpected earnings” and their contemporaneous association with security returns; (iii) the forecasting of future security returns. The selection and definition of accounting numbers in most of these types of studies have, by and large, been quite heuristic. The accounting variables are usually selected with little consideration given to their empirical time-series behavior; more important appears to be their intrinsic economic connotations. The approaches can thus be thought of as stipulating the existence of “real” economic variables, e.g., real income for a period, and then using numbers of published accounting statements as estimates of the real variables. The errors in estimates of the true variables are then often minimized by the use of aggregation procedures and the diversification effects of such procedures. The postulating of real economic variables has another methodological advantage: it permits the use of comparative statics analysis of corporate behavior and its effect on equity risk and return. For example, Hamada [7], among others, has shown that leverage affects risk in the usually hypothesized manner but this analytical result depends on the assumption that leverage and earnings are real and unambiguous economic variables without “measurement” errors.

The assumption that investors can borrow and lend at a riskless interest rate reduces the Mean-Variance (M-V) efficient set to only one optimal unlevered portfolio. However, once we realize that the market is generally imperfect and that the borrowing rate is higher than the lending rate, we can no longer use the mean-variance Separation Theorem. Instead, a number of unlevered portfolios must be included in the efficient set, while the optimal unlevered portfolio is selected on the basis of the investor's preference. The size of the efficient set of unlevered portfolios is a function of the type of empirical data used and of the disparity between the borrowing and lending interest rates.

There appears to be some confusion in the literature on asset-pricing models about the role of default-risk in short-selling and borrowing by consumers. For example, in the Sharpe-Lintner ([16] [9]) model it is usual to assume that all consumers are able to borrow or lend without restriction, at the riskless rate of interest. This assumption has been recognized to involve an inconsistency in the theory, because with personal borrowing there is always a positive probability of default with the S-L assumptions, so that the consumer's bond (as seen by any lender) is not a perfect substitute for the safe asset.

The need for an empirical measure of the relative value of financial theories becomes more important as we increase their number and sophistication. Although there are several methods of determining value, here we emphasize relative predictive power. According to this single criterion, a theory is insignificant if it fails to increase our present ability to predict future events. We recognize, however, that a theory can be useful if it merely increases our understanding of real events, or if it is based upon realistic assumptions.

Since Markowitz [15, pp. 98–101] and Sharpe [19] developed the single-index market model (SIMM hereafter) it has received considerable research attention. Empirical tests have established the model's econometric significance [3, 12, 13] in partial equilibrim analysis. However, research into the relationship between the SIMM and its macroeconomic environment has been meager. It has been shown that the market factor changes intertemporally [13, 16, 18, 20]. However, whether these changes in the market factor and, more basically, changes in the macroeconomic situation affect the SIMM is unknown.

The concept of a relationship between assumed risk and realized return is intuitively pleasing and has become widely accepted in the field of finance. Until recently this acceptance was anchored largely in what Hirschleifer [11] has called the “notorious fact” that stocks yield more in the long run than bonds and Hickman's finding [10] (since challenged by Fraine [7]) that over the years 1900–1943 the average ex post yield on publicly issued corporate debt was higher the lower the initial quality rating. However, with the advent of the capital asset pricing model of Sharpe [21], Lintner [16], and Mossin [19] the risk-return tradeoff concept has grown in importance and scope. The capital asset pricing model itself has weathered the years well, but has been theoretically and empirically revised, extended, and otherwise altered. Little remains of the original formulation except the proposition that in equilibrium more risk leads to more return--where “risk” for common stocks now means the nondiversified component as measured by the “Beta” coefficient of return volatility vis-à-vis the general market. As Modigliani and Pogue [18] observe after a review of the “more important” empirical tests of the capital asset pricing model: “Obviously, we cannot claim that the CAPM is absolutely right. On the other hand, the empirical tests do support the view that beta is a useful risk measure and that high beta stocks tend to be priced so as to yield correspondingly high rates of return.”