In planning any finance course an important consideration is its economic content. After all, financial decisions are invariably made in the context of both micro and macro uncertainty. The micro issues are often given extensive coverage in the form of models that optimize returns, cash flows, or credit choices, and the techniques needed to produce the required input for those models: ratio analysis, proforma statement preparation, and valuation frameworks such as the capital asset pricing model. Yet, the macro uncertainty is very often assumed away.

Until recently, most interest in econometrics was directed toward the data analysis problem. However, as opportunities for controlled experimentation in economics and business become more common, econometricians' interest in the statistical theory of experimental design is a natural consequence. Design techniques have and are being applied in marketing research, and in the contexts of such policy areas as the negative income tax and manpower experiments, the housing subsidy and health insurance subsidy experiments, and others. Experimentation in economics and business is an extremely complex research undertaking compared to the experimentation in other fields (such as agriculture, physics or chemistry) for which most of the design theory was developed. So, control experimentation in business and economics tends to be expensive in dollars, time and research talent. All this suggests the importance of carefully designing experiments to maximize their information output (efficient design) and the need for econometricians to extend the design theory in a number of directions of particular interest to economists and business researchers. This paper provides a solution to the problem of experimental designs for various multiple equation regression models frequently encountered by business and economic researchers.

Recommendations provided by brokerage houses are often classified as to investment term (near,…) and objective (growth,…). An extensive set of recommendations made during the years 1964-1970 was examined. Issues addressed included availability of descriptors and stocks categorized by descriptors: differences in risk; the presence and pattern of risk-adjusted returns for a 19-month period surrounding the recommendation; the differential impact on trading activity; the reaction of the market to the recommendations; and parallels between the results and previous research efforts by other authors.

This paper extends the results of previous work by the author in the development of a structure for analysis of rather general two-currency decision problems using an nstage dynamic programming model. After a brief review of the model, the paper provides a characterization of a convertibility scheme as a set function which assigns to each currency portfolio a set of currency portfolios which can be attained from the original portfolio, operating through the convertibility scheme. The concept of a substitutable convertibility scheme is developed; the substitutability property allows the decision maker to substitute a functionally determined single currecy payoff for a given twocurrency payoff. Two tests to determine substitutability in general, and for a particular return function, are developed. The modest reduction in dimensionality of the dynamic programming problem arising from this property is explained. Some specific convertibility schemes are then characterized, including free convertibility, inconvertibility, retention quotas, maximum balance, maximum acquisition, and multiple rate schemes. The substitutability of free convertibility is demonstrated. A retention quota scheme which allows free sale and purchase of retained funds in a parallel market is shown to be equivalent to a free convertibility scheme, and therefore substitutable.

This paper examines the problem of the selection of first-, second-, and thirddegree undominated portfolios by using the properties of the Laplace transform (L-T) of the distributions of portfolio returns. It is assumed that the joint distribution of n interdependent prospects, as well as its Laplace transform, is known or may be estimated from past data. Next, it is shown that the L-T of the portfolio returns may be expressed very simply in terms of the L-T of the joint distribution. A theorem is then proved, which uses results from L-T theory and shows that stochastic dominance between two portfolios of first-, second- or third-degree may be expressed by inequalities between the L-T's of the portfolios and their derivatives. It is also shown through an example how this theorem may be used in finding undominated portfolios.

This paper develops a comprehensive approach to project selection and financing decisions, when firms' securities are traded in competitive markets and investors prefer “more to less.” The technique is based on direct inferences from observed security prices.

In this paper, we develop a Capital Asset Pricing Model (CAPM) using a mean-lower partial moment framework. We explicitly derive the valuation formulas for the equilibrium value of risky assets and provide a distribution-free testable hypothesis for empirical validation of the new CAPM. We show the invariance of our results to the problem of estimation risk. We also show that when the probability distribution of security rer turns is the normal distribution, the stable Paretian distribution (with the same characteristic exponent between 1 and 2 and the same skewness parameter (not necessarily zero)), or the multivariate t-distribution, our CAPM reduces to the traditional two-parameter CAPM.

This paper examines empirically the relationship among the stability of security and portfolio betas and (1) the length of the sample period used to calculate betas, (2) beta adjustment techniques, and (3) beta magnitudes. Beta values are forecast using four models: (1) a naive model which assumes the beta value in period t + 1 is the same as in period t, (2) Blume's regression model, (3) a regression model used by Merrill Lynch, Pierce, Fenner and Smith, and (4) a Bayesian procedure suggested by Vasicek.

Theoretically the money stock could be controlled by targeting, either a reserve aggregate or the Federal funds rate. In practice, however, one strategy might be more effective than the other if the relationship between its operating variable and the money stock was more predictable.

A review of the textbooks and syllabi used in courses on international financial management in several Eastern and Midwestern business schools reveals the existence of a number of common topics but substantial differences in the relative emphasis accorded to issues. Some concentrate on the financial and foreign exchange markets and on exchange rate forecasting; some on the measurement and hedging of exposure; some on the financing of international transactions; some on international accounting and control; and some on portfolio theory and capital market issues. Why do they differ? In part, because the educational objectives of institutions are different, some being much more practiceoriented than others. The M.B.A. students at Chicago, for example, are much more willing to engage in a theoretical discussion than are those at Columbia, who have a stronger decision-making orientation. Other differences arise from the pedagogical approach–the heavy use of cases, for example, tends to require a concentration on applicable techniques.

This paper analyzes the effect of limited information and estimation risk on optimal portfolio choice when the joint probability distribution of security returns is multivariate normal and the underlying parameters (means and variance-covariance matrix) are unknown. We first consider the case of limited, but sufficient information (the number of observations per security exceeds the number of securities or the prior distribution of the underlying parameters is “sufficiently” informative). We show that for a general family of conjugate priors, the admissible set of portfolios, taking estimation risk into account, may be obtained by the traditional mean-variance analysis. As a result of estimation risk the optimal portfolio choice differs from that obtained by traditional analysis.

This study examines the observable impact an electric utility's announcement of its decision to invest in nuclear power has upon stockholders' expected returns. The response of shareholders is examined via residual analysis and by a dummy variable switching regression technique.

This paper utilizes a two-parameter model of segmented securities markets to develop equilibrium implications concerning the impact of statutory investment restrictions upon the market prices and allocation of risky securities. The distinguishing feature of the model is the existence of a subset of securities common to the opportunities of all investors and therefore said to “span” the investor population. These common opportunities are shown to permit intersubset security transactions which integrate the various market segments and lead to the following theorem and tendency concerning equilibrium prices and portfolios:

Theorem: In the absence of active barriers against short positions, the equilibrium expected return for any security spanning the investor population is an exact linear function of its contribution to total market risk, irrespective of the number of distinct investor segments that may exist.

Tendency: The economic characteristics of the equilibrium risky portfolio for any investor, irrespective of the market segment to which he or she may belong, will approximate the characteristics of the market portfolio of all risky assets in the economy in all relevant risk dimensions.

International finance has developed into a recognized field of study within the broader discipline of international business. This has occurred because increasing commitments of companies to international operations have forced more and more financial managers to face a number of problems and issues not found in a strictly domestic setting. Foreign currency exchange risks, exchange controls, restrictions on the flow of funds, diverse accounting and taxation systems, host government interference, and the effects of worldwide inflation on enterprise assets, earnings, and capital costs are just a sample of the variables calling for specialized knowledge.

The purpose of this paper is to provide evidence concerning investor reactions to off-balance sheet disclosures of concancellable leases as reflected in security prices. A valuation model is defined based upon the work of Modigliani and Miller which expresses the market value of the firm's common stock as a function of lease indebtedness. Data for the empirical analysis are obtained from Compustat and SEC form 10 K's. Crosssectional regressions are run by risk class on samples of 620 firms reporting rent expense, 432 firms disclosing lease commitments, and 139 firms reporting present values of so-called “financing” leases.

Looking back over the last two decades, financial economists can find considerable cause for pride and self-congratulation in the development of their discipline. From the earliest steps toward a rigorous theory of capital budgeting, through the Modigliani-Miller theorems on corporate financing and cost of capital, to the development of the capital asset pricing theory, the field of finance has garnered a well-deserved reputation for rigor, analytic sophistication, and pace of intellectual growth.