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.

The Black-Scholes option pricing formula assumes that the variance of the return on the underlying stock is known with certainty. In practice an estimate of the variance, based on a sample of historical stock prices, is used. The estimation error in the variance induces error in the option price. Since the option price is a nonlinear function of the variance, an unbiased estimate of the variance does not produce an unbiased estimate of the option price. For reasonable parameter values, it is shown that the magnitude of the bias is not large.

This paper applies the technique for valuing compound options to the risky coupon, bond problem. A formula is derived which contains n-dimensional multivariate normal intecjrals. It is shown that, for some compound option problems, the special correlation structure allows an application of an integral reduction which may simplify the numerical evaluation. The effects of various indenture restrictions on the formula are discussed, and a new formula for evaluating subordinated debt is presented.

An equity-linked life insurance policy with an asset value guarantee (ELPAVG) is an insurance policy whose benefit payable on death or at maturity consists of the greater of some guaranteed amount and the value of a reference portfolio which is defined by the deemed investment of a predetermined component of the policy premium in a portfolio of common stocks or mutual fund–the reference fund. In an earlier paper we demonstrated that the benefit payable under an ELPAVG could be decomposed into the known guaranteed amount and an immediately exercisable call option to purchase the reference portfolio for an exercise price equal to the guaranteed amount. The principles of the option pricing model were then employed to derive the equilibrium premium for both a single premium ELPAVG contract and a periodic premium contract. It was further noted that the hedging arguments, which are the core of most of the recent theory of option pricing, could be employed to derive an investment strategy for the insurance company which would eliminate the risks associated with the sale of ELPAVGs: this is an important result, for ELPAVGs may pose a significant threat to the solvency of insurance companies since the risks of loss under different contracts are not independent, but are commonly related to the overall performance of the reference fund. Actuaries have responded to this threat by attempting to determine a level of reserves sufficient to reduce the probability of ruin to an acceptable level. On the other hand, adoption of the riskless investment strategy in theory eliminates the need to hold any reserves except against mortality risk.