The financial dilemmas faced by large municipalities, due in general to decreasing tax bases, increasing public services, inflationary pressure and in some cases fiscal irresponsibility, have brought increased attention to the subject of municipal bond ratings. In order to gain insight into those factors which are most significant in explaining the ratings, a set of financial ratios is investigated. Such ratios are frequently used to describe characteristics of the risk of municipal obligations. This paper attempts to determine if these ratios can be effectively used to predict ratings.

The object of the present study was to test the random-walk model, by runs analysis and spectral densities, against representative stock market indexes of the Bombay, New York, and London Stock Exchanges. The three indexes examined were the Bombay Variable Dividend Industrial Share Index (BVDISI), consisting of 603 industrial stocks, the New York Standard and Poor's 425 Common Stock Index (S & P 425), and the London Financial Times-Actuaries 500 Stock Index (London F.T.-A.). The test period covered 132 monthly observations for each index for the 11-year period 1963–1973.

The general characteristics of the London F.T.-A. were found to be slightly different from the other two indexes studied. The first difference series the London F.T.-A. has higher mean and variance than BVDISI and S & P 425. However, the first differences of the log indexes did not show any significant differences. In this study, no effort was made to explain any inconsistencies between the London F.T.-A. and the other indexes, although previous studies [4, 12, 13, 20] have attributed such differences partly to institutional The behavior of the BVDISI is statistically indistinguishable from the London F.T.-A. and S & P 425 in terms of the tests of this paper. In runs analysis of consecutive price changes of the same sign, the study confirmed that the expected number of runs and observed number of runs are very close each other. For all the indexes, the actual and expected distribution of length turns out to be extremely similar, with probability equal to 0.5 rise or fall.

Further, the spectral densities, estimated for the first difference (raw and log transformed) of each index, confirmed the randomness of the and no systematic cyclical component or periodicity was present. Based tests, it is evident that stocks on the Bombay Stock Exchange obey a random walk and are equivalent in this sense to the behavior of stock prices in markets of advanced industrialized countries examined in this article.

We began this paper by posing four questions about the characteristics of optimal geometric mean portfolios. Tentative answers to these questions were obtained from an examination of the solutions to a relatively large number of geometric mean portfolio problems generated from a Monte Carlo simulation of ex-ante security return data. The results of this examination can be summarized as follows. First, the number of risky securities contained in an optimal geometric mean portfolio depends on one's expectations concerning future market conditions and on the conditions under which borrowing is permitted. If all capital must be invested, the investor who believes the market will fall should invest in just one security, he who believes the market will remain unchanged should diversify among two securities, while he who believes the market will rise should diversify among four to seven securities. In the event that some capital must be withheld from investment, the investor who believes the market will rise and who can borrow on reasonable terms will again diversify among four to seven securities, choosing the same securities in the same relative proportions as in the preceding situation. Should the investor be permitted neither to borrow nor to invest all his capital, his best portfolio consists of two to four securities, assuming he expects the market to rise.

In this paper, possible factors affecting the second-pass regression results in capital asset pricing are investigated in detail. First, the true functional form used to test the risk-return relation is determined by using Box and Cox's [2] generalized functional form technique. Secondly, Box and Cox's residual analysis and transformation technique are used to show the importance of the skewness effect in capital asset pricing. Finally, some other factors affecting the results of second-pass regression coefficient in capital asset pricing also are explored. From these analyses, it is found that the functional form, the skewness effect, and the change of market condition are the most important factors in affecting the empirical conclusions in testing the bias of composite performance measures and the risk-return relation.

If the “smart money” was out of Franklin before its financial difficulties became public knowledge, just what elements of Franklin's balance sheet were the sagacious analysts reading and why weren't the banking authorities aware of this information? The purpose of this paper is to determine what balance-sheet and income-statement figures, if any, could have been arrayed in an ex post early-warning system to spotlight Franklin's developing problems.

The rationality of compensating balance requirements has been widely debated in the literature and among participants in the market for loanable funds. Rationality in this context refers to a net gain in interest income for the lending bank in the transaction without, at the same time, an increase in interest cost to the borrowing firm; or, conversely, a decrease in interest expense to the borrower without, simultaneously, a decrease in income derived from interest on the transaction by the bank. The lack of consensus as to whether or not compensating balance requirements are rational is based on the absence of uniform assumptions regarding the imposition of these requirements as well as by their restrictive, if not unrealistic, nature. Thus, Davis and Guttentag [2] and Hodgman [9] come to the conclusion that compensating balance requirements (hereinafter also known as c.b.) are indeed rational. However, this conclusion is based on the assumption that the borrowing firm maintains voluntary demand deposits in the lending bank or in another bank (i.e., balances that the firm employs for transaction and/or precautionary purposes which do not serve to satisfy c.b. for any loan or service performed by either bank) and that these deposits are sufficient in quantity to meet c.b. On the other hand, Hellweg [8] finds the use of c.b. irrational inasmuch as he assumes a lack of voluntary balances in either bank. In between these two extremes, Gibson [7], Shapiro and Baxter [11], and Wrightsman [13] suggest that c.b. may either be rational or irrational depending on the proportion of these balances satisfied through the voluntary holdings of the borrowing firm.

In a recent paper Joy and Porter [4] used the concept of stochastic dominance to address the question of whether or not mutual funds outperform the Dow Jones Industrial Average (DJIA). Since that time Meyer [5] has proven a theorem in the area of stochastic dominance which allows one to make further application of stochastic dominance to this question. The major purpose of this paper is to demonstrate the power and relevance of the recently developed stochastic dominance theorem in ordering investments for groups of investors. In doing so, some evidence is presented concerning mutual funds and the DJIA.

In contrast with the normal undergraduate or graduate level course in international finance discussed by the other panelists in this session, the international financial material covered in the Masters in International Business Studies (MIBS) program at the University of South Carolina is not tightly collected into one segment, but rather is disaggregated and reintegrated into a larger curriculum design. In this degree program, designed specifically for the entry level training of personnel with aspirations for multinational responsibility, all business education (with the exception of a secondyear planning-policy course) is integrated into one large “megacourse,” the Unified Business Program. Within this megacourse, specific learning objectives have been developed and individual learning segments, many drawing on faculty and concepts from different disciplines, have been designed to meet these learning objectives. Material traditionally covered in an international finance course forms a portion of a number of these segments, and it is the purpose of this paper to outline how this material is integrated into the main flow of the program.

The broad import of the evidence is that the application and qualification by a firm for listing on one of the two major American securities exchanges did, at least during the years encompassed by our investigation, constitute an event with which were associated abnormal positive investment returns on the shares involved. Even though a portion of those returns seem subsequently to have been surrendered, the initial net effect from application through listing date was quite substantial, and the later correction thereto was much more modest. The average combined impact visible in Table 3 during the six-month period beginning with the listing application, for example, was a net positive annualized return approximately 17 percent above that enjoyed concurrently by the general run of comparable-systematic-risk securities in the market. The explicit consideration of such risk distinguishes the present investigation from earlier studies in the area [7] [8] [10] [12] [13] [18].

On balance, then, it appears not unreasonable to conclude that listing did indeed “have value” for the companies examined. While one could argue that it was, intrinsically, the corporate developments (and the dissemination of the news thereof) which led to listing that were the real sources of value, the observed concentration of excess returns in the close proximity of the various application and listing dates would suggest that those actions provided useful market signals which did, in themselves, have a detectable favorable payoff—perhaps if only by way of accelerating the investment community's appreciation of the improvement in the applying firm's underlying operating circumstances. We interpret the evidence as supportive of that hypothesis.

The implications of the same evidence for questions of market efficiency, however, are somewhat more ambiguous. There would seem, as noted, to be in the data indications of certain possible information-response time lags that are not totally consistent with efficiency; and there is an apparent systematic initial price overreaction to application-cum-listing which is later remedied. Transactions costs, on the other hand, have not been considered here, and these clearly would impede the adjustment process by raising the threshold for investor action. Despite some cause for suspicion, therefore, a definitive judgment about efficiency must await further investigation.

In our theoretical work on DSD ([17], [18], [19]), specially constructed examples were used to demonstrate that DSD is stronger than TSD. The results of the present paper imply that similar examples also arise naturally from realworld data. They also suggest that such examples are rare. In the specific cases studied here, the differences between these two stochastic orderings are real, but small, and TSD would likely be a suitable approximation to DSD for practical purposes. The differences between the resulting efficient subsets seem relatively less important as the size of the initial portfolio universe increases. For example, the percentage reduction in the efficient TSD subset for a 1000-portfolio problem is smaller than for a typical 100-portfolio problem. This was found to be true throughout the preliminary phases of the study, as well as in the final phase reported here. The (to us) disappointing performance of DSD resulted primarily from the left-tail problem, which became increasingly prevalent as the initial portfolio set expanded. This suggests that DSD would be most useful in problems of choice among relatively few alternatives, perhaps of the capital budgeting type. In addition, there are numerous nonfinancial problems in which DSD could prove to be useful in ranking alternative management policies. Finally, the greater strength of DSD may remain important in theoretical investigations, especially for situations in which the left-tail problem is absent.

The general framework employed in analyzing diversification among securities involves the mean-variance theory of portfolio selection described by Markowitz [8]. Observation of the securities comprising the efficient set indicates which financial sssets possess attributes (i.e., expected return and covariances) making them worthwhile components of an optimally diversified portfolio. This paper will be concerned with forming an efficient set from four security classes—common stocks, preferred stocks, corporate bonds, and U.S. government bonds (hereafter denoted CS, PS, CB, and GB, respectively). The first objective will be to derive and analyze an efficient set from a sample of these securities in order to determine which securities have potential benefits for diversification.

In equilibrium, each new capital asset must be priced properly relative to other assets. If an investor can also buy and sell assets in his portfolio costlessly and quickly, then the new asset will be accepted immediately and fully into the market and it will immediately behave as though it were a seasoned or previously available asset. However, it is often argued that recently issued bonds and seasoned or fully distributed bonds behave differently due to the frictions and risks associated with distributing a new security in the market. And it is also argued that recently issued bonds undergo a behavioral transformation as they become seasoned bonds. According to this argument there are significant empirical behavioral differences between recently issued bonds and seasoned bonds [4,5,7,9,13]. These differences disappear as the market gradually absorbs the new bond issue and the bond becomes “seasoned.”

The problem of bond portfolio selection may be viewed as consisting of two parts. The first is concerned with the maturity profile of the total cash flows (the after-tax coupons and principal repayments) which the investor requires; in general there will be many portfolios of bonds which provide the desired cash flow profile. Accordingly, the second problem is the choice of a particular portfolio of bonds which provides these cash flows in some optimal fashion. If bonds are default free, future taxes are known, and differences in marketability and callability among issues can be ignored, then price is the only relevant criterion in choosing among alternative portfolios. This paper describes a simple linear programming model for this last problem of selecting the portfolio which provides a given pattern of cash flows at minimum cost. This provides a method for improving any initial portfolio, where such improvement is possible, by increasing its yield without reducing any future after-tax cash flows.

A stock purchase warrant gives the owner the option to buy some predetermined number of shares of the associated common stock at a specified price over a stipulated time period. The specified price is called the exercise price of the warrant. The stipulated time period is quite variable, though the life of a typical warrant will exceed five years.

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 examines the stationarity of beta coefficients, especially in regard to recent, major stock market trends. In addition to the usual correlation tests for stationarity, this paper describes a more direct method for testing the stationarity of portfolio betas. The method involves the use of paired t-tests which show separately the degree of stationarity for each portfolio beta. In the process of testing for stationarity, the portfolio betas also are adjusted for measurement error using a formulation suggested by Blume [3].

For decision makers, we emphasize that it is feasible to consider multiple subjective criteria in a capital budgeting problem. The applicability of the procedures outlined is enhanced by the limited data base necessary to obtain subjective rankings, remembering that here we are only concerned with side criteria.

In this paper, we have formulated the capital investment problem in a graph theoretic framework. We characterized the problem as being composed of a set of finite alternatives, a set of subjective criteria, and a set of resource constraints. This formulation leads to an integer programming problem in which the rankings of sets of alternatives on the multiple subjective criteria are aggregated into a single index. It is stressed that we used a single budgetary constraint in the example but that the procedure can accommodate additional constraints. We also assumed that management has specific side criteria and that it is possible for the decision makers to rank all alternatives for each of those criteria.

The application of the above procedure to any problem involves three steps:

1) From the decision maker, or groups of decision makers,

the agreement matrix π is developed. This involves:

a) defining the alternatives,

b) defining the side criteria,

c) asking management to rank each alternative under each criterion, and

d) if appropriate, asking management to weigh the relative importance of each of the side criteria.

2) From the technical considerations of the problem, determine the resource constraints. In our example, this included the investment requirements of each alternative and the total resources available.

3) Solve the problem as posed above as a group of m integer programming problems.

In this study two alternative techniques to analyze pooled time-series and cross-section data are used to test the importance of firm effect and time effect in the financial analysis. These techniques are also integrated with the functional form parameter estimation method to show the importance of appropriate functional form in handling a pooled time-series and cross-section type econometric model. The data on the electric industry show that both the time effect and cross-section effect are of importance in explaining stock price variation. It is also found that linear form (and/or) log-linear form is not always appropriate in testing the importance of both time effect and firm effect in financial analyses.

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.

This paper analyzed the issue of why large commodity futures traders hold a large percentage of their portfolios in straddle positions where, for the most part, such behavior implies that they are holding assets with negative expected returns. It showed that an earlier paper by Schrock [2], which suggested that such behavior provided a means by which investors could enhance their risk-return tradeoffs, provided only a partial explanation for this behavior which, in a world of positive interest rates, held only under fairly restrictive conditions. Thus, it went on to develop a more general result which strongly suggests that differentially low margin requirements on straddle positions provide a strong incentive in a world of positive interest rates for investors to hold commodity straddle positions. With some modification the model developed in this paper can be used to derive similar conclusions for certain classes of transactions in the stock options market.