Determining the market values of streams of future returns is a task common to many sorts of economic analysis. The literature on this subject is extensive at all levels of abstraction. However, most work has not taken uncertainty into account in a meaningful way.

With the increasing emphasis on the performance of managers of institutional portfolios, it becomes important to develop an accurate and complete measure of investment results. Accordingly, this study will be devoted to clarification and possible resolution of the following issues:

1. How may operating results be segregated from contributions and withdrawals of capital?

2. How may the “dollar weighting” inherent in compound rates of return be eliminated?

3. Should investment, in the context of return on investment, be cost-based or value-based?

4. How should risk be quantified?

5. Can both risk and return be considered in one composite measure of investment performance?

Two general methods of computing the rate of return on common stock are being discussed widely. These methods are the internal rate of return and the geometric mean of the annual rates of return. The Gordon-Shapiro formulation, , is the best known model of the former type.

The increase in corporate liquidity over the past ten years, together with higher levels of interest rates and growing sophistication among corporate treasurers and bank portfolio managers, have contributed to the increasing importance of various money-market instruments. The relative position of the Treasury bill has declined, and bank time certificates of deposits, short-term issues of municipalities, and commercial paper have assumed greater importance. The fundamental reason for the attractiveness of alternatives to Treasury bills is, of course, the additional yield that the investor can obtain in the substitute instruments. The differential yield spread over Treasury bills can be explained substantially by two factors—the difference in marketability and the existence of some default risk on the alternative securities.

Commercial bank portfolio models developed by Hester [6], Porter [11], and Kane and Malkiel [7], among others, relate the structure of an asset portfolio to variation in the level of deposits. Similarly, in a recent application of linear programming to asset management, Cohen and Hammer [3] specify a liquidity constraint based upon deposit fluctuations. However, there have been few empirical studies of the determinants of demand deposit fluctuations. The purpose of this paper is to extend the work of Gramley [4], Rangarajan [12], and Wilkerson [14] on the determinants of deposit variability. In this paper, the analysis will be confined to demand deposit variability.

The recent literature in the field of commercial banking has centered to a considerable extent around the branch banking controversy and bank merger activities, particularly as regards their economic effects on banking structure and performance. Much has been said, moreover, about the effects of branching on the “public interest,” whether such branching is carried out through merger or de novo branching. Public interest is usually defined as including deposit safety, adequate compensation by banks to depositors for the use of their money, availability of credit for borrowers at competitive rates of interest, and, in more general terms, increased competition in banking without sacrificing safety.

“The Dynamic Characteristics of Chow's Model,” by E. R. Arzac, appeared in the December 1967 issue of this Journal.

P. 385, line 14: “lagged dependent variables” should be omitted.

P. 390: The last line on the page was ommitted. It should read:

“can generate a set of random vectors that would correspond to the distri-”