The analysis has shown that insurer investment performance parallels that of other investors; greater returns are associated with greater variability. However, with the acquisition of higher levels of investment risk insurers generally reduce the level of underwriting risk which is undertaken. Thus, insurer management apparently attempts to keep ruin probabilities within some undefinable but clearly present limits. In the process of trading off between investment and underwriting risk, a higher rate of return to net worth is sacrificed.

The sacrifice of potentially higher rates of return to equity, however, does not place the insurer at a disadvantage relative to the capital market or make attractive the alternative of operating as an investment trust. Under reasonable conditions governing the risk and return associated with underwriting activities, the insurer return to net worth is in a more efficient position as the result of underwriting activities than that offered by the capital market alone. For a given risk position, the return to the insurer exceeds that available from the capital market alone. Thus, so long as marginal returns to underwriting are positive, the leveraging afforded by the expansion of premium volume produces a superior return over the traditional leveraging which might be employed by an investor in the capital market.

S-L have derived a simultaneous equation CAPM to offer a robust test for the interdependent assumption of the single equation CAPM. However, their empirical results are subject to the multicollinearity problem associated with 2SLS. For improving their results, several alternative estimation methods are used to estimate a seven-equation system for the oil industry. In accordance with both the multicollinearity criterion and residual analysis, it is found the modified 2SLS is the most appropriate method to be used to estimate the S-L model. From the results obtained from the modified 2SLS, it is shown that the market rate of return still is a relatively important factor in predicting the movement of capital market in the simultaneous equation CAPM.

After applying a better estimation method to the S-L simultaneous equation CAPM, it is shown that the S-L model has given us the interesting interrelationship of capital asset pricing within a particular risk class.

This article develops a criterion for comparing warrant financing with further common stock financing from the viewpoint of a firm's current stockholders. This criterion is then related to a complementary one presented by Bierman [1] and a condition is imposed on Bierman's cost of warrant financing for warrant financing to be preferred to further stock financing. Finally the article considers the limitations of these criteria and qualitatively discusses risk considerations that influence the attractiveness of warrant financing.

In a recent article in this journal [6], Clement G. Krouse and Wayne Y. Lee (hereafter K-L) presented a model of optimal equity financing of a corporation based on Pontryagin's maximum principle. In this note the basic assumption of a constant internal rate of return of the K-L model is relaxed. As a result, the financial implications of the K-L results remain essentially unchanged, but their applicability is extended considerably, and some undesirable solution characteristics are eliminated.

In this paper, a short-run partial-adjustment model of the demand for credit union shares was specified and estimated with time series data. The estimated results were used to derive long-run, equilibrium demand coefficients and elasticities. The main conclusions are that credit union shares are substitutes for deposits at savings and loan associations, time and savings deposits at commercial banks, and marketable bonds. Moreover, the implications of the statistical results are that credit union and savings and loan shares are more closely related to more liquid assets than to long-term assets. While real income was employed as a constraint variable, it was employed as a maintained hypothesis since the use of a wealth constraint led to perverse results. Also, some evidence was presented that the elasticities of the demand function for credit union shares are different from those of an aggregate savings deposits function. Thus, it is likely that an aggregate demand function will contain aggregation bias.

In a previous paper in the Journal of the American Statistical Association, Fielitz and Smith [16] present evidence in favor of asymmetric members of the stable family of distributions for describing stock price changes. Support for this contention is derived from an empirical examination of the daily closing prices of 200 stocks from the New York Stock Exchange from December 23, 1963, to November 29, 1968. In particular, the empirical examination of these securities indicates that outliers (especially in the short-tail (left-hand tail) of the distributions), kurtosis, and skewness are present in the distributions. These characteristics are consistent with the hypothesis that stock price changes belong to the asymmetric class of members of the stable family of distributions.

In this paper, we present a new model for the measurement of yield curve relationships that is derived from interest rate theory, utilizes an objective procedure, and provides measures of the accuracy of the results obtained. In empirical tests of the model, the structure postulated is found to consistently provide a high level of explained variation in observed market yields on U.S. Treasury bonds. In a comparison with a yield curve model previously offered by Cohen et al., the present model is superior in terms of both goodness of fit and other associated statistical criteria. Clear evidence exists that the impact of coupon level upon yield is statistically significant, consistently positive in direction, substantial in magnitude, and variable over time. These results indicate that correction for coupon differences in the calculation of forward rates for use in empirical tests of interest rate theory is necessary in order to obtain reliable results. Finally, the yield curve model is used to calculate estimates of the risk-free pure discount rate.

In a general sense this analysis has been concerned with the extent of a market and the effect of limiting the extent on the prices of assets in that market. One example of the type of limited market extent with which we have been concerned is provided by nonmarketable assets and another is provided by market segmentation.

Unambiguous statements of the effect of nonmarketable assets and market segmentation on the level of prices require that and be oppossite in sign (unless one or both are zero). Only two cases have been identified where unambiguous statements can be made. The first, the case of constant absolute risk aversion, implies there is no effect of nonmarketable assets or market segmentation on the level of asset prices. The second case, constant relative risk aversion, where the coefficient of relative risk aversion is equal to or less than one, implies that prices are lower in the presence of these imperfections.

Arrow [1] argues that the coefficient of relative risk aversion must “hover around 1.” Thus, if constant relative risk aversion is a reasonable approximation to reality we should accept the implication of the latter case. Certainly, if a choice had to be made, the latter case would be the more palatable of the two. That is, constant relative risk aversion does imply decreasing absolute risk aversion, which appears more acceptable than the hypothesis of constant absolute risk aversion.

The constant relative risk aversion case has implications for such things as the organization and operation of markets and corporate merger decisions. For example, higher margin requirements that inhibit diversification would be expected to lower asset values. Also, as a matter of corporate policy, it would appear that, ceteris paribus, mergers that increase the extent of a market would be preferable to within-market mergers.

Multiasset portfolio selection models stated in terms of the expected utility criterion generally require the evaluation of multiple integrals. This reality has severely hindered attempts towards the development of computation methods to determine optimal portfolio allocations when there are a large number of assets. Aside from special cases, expected utility is not convergent into a simple closed form; the complexity from the point of view of computation is then perhaps most easily appreciated if one realizes that every iteration in a nonlinear program demands the estimation of several integrals (see Ziemba [23] for details). Such calculations are extremely costly when the number of assets is large. It is, consequently, of interest to approximate the expected utility function by a function which is easier to optimize over the set of feasible portfolios.

Investor behavior was measured on a firm-by-firm basis by the volume of transactions in the stock of a firm. While data on an individual investor by individual investor basis would be desirable, it is not as readily available as stock volume data. Volume represents a simple summation of individual actions and can be considered at least a partial disaggregation of stock-market activity.

The reasons for individual investor action were considered to be (1) a change in trade-off between risk and return, (2) the unfolding of time-dependen consumption plans, and (3) perception of information that changes expectations. It was argued that, in general, the first reason can be ignored, occurring at discrete and probably lonq intervals, and that the second reason is unlikely to have an effect over a few years on the total volume of transactions in the stock of a given firm. Thus, fluctuations in such volume were considered to reflect perception of information about the given firm by investors in that firm.

Market behavior was analyzed in terms of general market movements and market movements specific to the firm. Market-wide effects on both price changes and volume of transactions.in the stock of a given firm were filtered out. This left price changes indicating the flow of, and volume indicating a reaction to, information unique to the given firm.

Perception of information about a given firm by investors, measured as indicated above, was then examined for association with the flow of information coming onto the market as indicated by fluctuations in the price of the stock of the firm net of market-wide effects. The percentage of volume of transactions in the stock of a given firm that was explained by fluctuations in the stock price was taken as a measure of the efficiency of investor behavior with respect to the given firm. The validity of accepting this interpretation is based on the following assumptions: (1) the probability that investors' demands for a given stock continually exactly offset each other in such a manner that volume occurs without price change is negligible, (2) specialists in securities are unable to perfectly anticipate changes in market demand in such a manner that price changes occur without volume.