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In a recent paper Professor Bowman attempted to establish a theoretical relationship between financial (accounting) variables and market determined risk. His major conclusion was that "systematic risk is not a function of earnings variability, growth, size, or dividend policy" (p. 628). The purpose of this comment is to indicate some errors in the paper and to clarify some confusing issues. [ABSTRACT FROM AUTHOR]

This article presents a discussion of a paper that examined the market values of multinational corporations. In the paper the authors stated that shares in U.S. multinational firms should sell at a premium in relation to the price of shares for domestic firms, after adjusting for risk. The author examines the foundation of this statement and questions why more multinational firms are not started if their shares sell at premiums. The author also calls into the question their analysis of the investment flows in multinationals corporations.

The article announces meetings scheduled on the topic of finance, including the American Finance Association's meeting that will take place from December 28-30, 1990 in Atlanta, Georgia; the Risk Theory Seminar, which will take place in Des Moines, Iowa between April 20-22, 1990; and the MidSouth Academy of Economics and Finance will hold its annual meeting in Jackson, Mississippi on February 7-10, 1990.

Patric Hendershott has argued recently that Irwin Friend and Stephen M. Goldfeld and Dwight M. Jaffee have much exaggerated the extent to which the asset-liability structure of savings and loan associations creates for associations a serious propensity for "disintermediation" of savings deposits when money and capital market interest rates rise sharply. Friend, Goldfeld and Jaffee, and others have taken the position that because savings and loan associations emphasize long-term, relatively immarketable mortgage assets but short-term savings deposit liabilities the yields they pay on savings deposits are inflexible upward relative to yields on competing assets. Therefore, when money and capital market interest rates rise sharply, net inflows of savings deposits are likely to be severely disrupted. Total savings deposits may even decline. Friend has argued that this "asset-liability structure problem" is important enough as a source of liquidity problems for savings and loan associations and cyclical instability for the home construction industry to make substantial changes in the regulatory framework which determines savings and loan association asset-liability structure desirable. Goldfeld and Jaffee [4, p. 631] find in the problem the rationale for the role of the Federal Home Loan Banks and Board as lender of last resort to the savings and loan association industry, a point with which Hendershott takes explicit issue. While Hendershott's paper is primarily theoretical, he does offer some empirical support for his view. The purpose of this comment is to argue that this empirical support is not persuasive. [ABSTRACT FROM AUTHOR]

If investors wish to maximize the probability of achieving a given level of wealth within a fixed time, they should choose the "growth-optimum" portfolio; that is, the portfolio with highest expected fate of increase in value. This paper has examined the implications for observed common stock returns of all investors selecting such a portfolio. Given some widely-used (and useful) aggregation assumptions, the growth-optimum model implies that the expected return ratio E[(1 + R[sub j])/(1 + R[sub m])] is equal for all securities. This implied equality of expected return ratios was utilized in analysis of variance tests with New York and American Exchange listed stocks from 1962-1969 in order to ascertain the basic validity of the growth-optimum model. The model was well-supported by the data. The growth-optimum model was compared algebraically to Sharpe-Lintner theory, which is probably the most widely-used portfolio result in empirical work. A close correspondence was demonstrated between their qualitative implications. For example, both models imply that an asset's expected return will equal the risk-free interest rate if the covariance between the asset's return and the average return on all assets, Cov(R[sub j], R[sub m]), is zero. For most cases, the growth-optimum model also shares the Sharpe-Lintner implication that an asset's expected return will exceed the risk-free rate if and only if Cov(R[sub j], R[sub m]) > 0. There are, however, some cases of highly-skewed probability distributions where this implication does not follow for the growth-optimum model. A close empirical correspondence between the two models was demonstrated for common stock returns. The procedure (1) estimated returns and risk premia implied by the two models from time series; (2) calculated cross-sectional relations between estimated returns and risks; and (3) compared the cross-sectional relations to the theoretical predictions of the two models. They could not be distinguished ... [ABSTRACT FROM AUTHOR]

The purpose of this paper is to acquaint the reader with psychology's recent endeavors to answer this general question. Along the way we shall touch on a number of related topics, including studies of the accuracy and reliability of judgment; techniques for modeling the judgment process and making intuition explicit; biases in judgments of probability, variability, and correlation; experimental studies of risk-taking behavior; and discussion of the relative merits of scientific versus intuitive approaches to making judgments and decisions. Wherever possible, implications of this work for investment decision making will be noted. If, as we proceed, we expose some warts, prejudices, and twitches, it is done in the belief that a full understanding of human limitations will ultimately benefit the decision maker more than will naive faith in the infallibility of his intellect. [ABSTRACT FROM AUTHOR]

The article presents a response from Henry A. Latane and William E. Young (L&Y) to concerns raised by Irwin E. Jones, P.L. Cheng, and M.K. Deets about L&Y's article "Test of Portfolio Building Rules," which appeared in the September, 1969 edition of the "Journal of Finance." Specifically, L&Y address claims that their paper improperly used overlapping holding periods in measuring portfolio returns, and that they misinterpreted the advantages of portfolio diversification. L&Y present data and arguments to defend their work.

It is a common place to describe the capacity of a person to command marketed goods and services generally as wealth. In a monetary economy the significant measure of wealth is the money's worth, or sum of the market prices if sold, of a person's possessions. The things one legally possesses may take varied forms; we say that wealth has been invested in these forms. The forms in which one's wealth is held are a consequence of choice, whether choice is exercised by analysis and deliberation or by simple inertia. The evidence of choosing lies in the investments we make. These are observable, and they are often capable of being understood, even by an observer, in terms of the information available to, and the expectations and preferences of, investors individually. The purpose of this paper is to demonstrate the relevance and coherence of the informative, appraisive and evaluative processes of investment choice. The resulting system of ideas incorporates in embryo all the basic features of investment decisionmaking in a real-world context. [ABSTRACT FROM AUTHOR]

The article presents commentary about a paper written by Roman L. Weil, Joel E. Segall, and David Green, Jr. (WSG) entitled "Premiums on Convertible Bonds," which was published in the June, 1968 edition of the "Journal of Finance." In that paper WSG explored to what extent bond premiums could be explained or predicted by available data. The author of the current paper notes that one factor omitted by WSG is investor expectations for the stock underlying the convertible. He offers empirical analysis supporting the effectiveness of this measure.

This paper is addressed to individuals engaged in research on portfolio management or investments. It has been prepared with two purposes in mind. The first is to describe a number of problems encountered in connection with the recommendation that the degree of risk assumed in a portfolio be measured as an important aspect of the portfolio's investment performance--a recommendation contained in the Bank Administration Institute (B.A.I.) report on pension and profit-sharing fund performance measurement [7]. The second is to identify some possible trends in future research on measuring the risk dimension of investment performance and to comment on the prospects of alternative lines of investigation. It is hoped that this material will contribute to development of the improved risk measurement methods advocated in the Institute's report. [ABSTRACT FROM AUTHOR]

This article looks at the results of a study which tests a theory of investment's ability to explain the annual investment of a firm. The theory assumes that an individual or firm desires security in addition to income, maximizing expected future incomes that are subject to the constraint that an acceptable level of security is met or maintained. It is assumed that the firm's debt-equity ratio is used as a measure of risk. A significant correlation was found to exist between investment and profits prior to depreciation. The author concludes that either firms are influenced by the desire for security or levels are determined by profitability of investment.

The author comments on a paper in the current issue contributed by Michael J. Brennan and Eduardo S. Schwartz. Insofar as the paper determines intermediate interest rates by assuming long and short rates, it reduces the dimensionality of term structure rather than presents a theory for it. Brennan and Schwartz also give a discrete version of the continuous, stochastic model for long- and short-term rates, an approximation the author is not sure can be justified. All the same, their work constitutes an important contribution to bond pricing.

The author comments on a paper in the current issue contributed by Harry DeAngelo and Ron Masulis. DeAngelo and Masulis have extended the work of Miller and others by showing that investors' demand for debt or equity securities--and firms' willingness to provide them--depends on the after-tax returns on each. Particularly insightful is the paper's treatment of dividends that concludes, absent a dividend-specific tax shelter, dividends will be neither demanded not supplied. Overall the author is pleased, although he would prefer that DeAngelo and Masulis had omitted some jargon in favor of more conventional terms.

The authors comment on an article related to bank funding risks, risk aversion and the choice of futures hedging, that was previously published in the "Journal of Finance." They assert that the central purpose of the article was to demonstrate the importance of considering both price and quantity risk in a bank's hedging decision. The previous article presents a model of a banking firm where the bank earns revenues from loans funded with either certificates of deposit or deposits. The author notes that the portfolio-choice model would generate a hedge for each of the separate sources of uncertainty facing the bank, whereas the firm-theoretic approach would generate a weighted average of the individual hedges.

The article comments on a paper by James C.T. Mao, "Essentials of Portfolio Diversification Strategy," which appeared in the September, 1967 edition of the "Journal of Finance." In that paper Mao discussed a procedure for constructing a diversified portfolio that involved first selecting a given number of securities, and then finding the optimal allocation among them. The author of the current paper surveys Mao's approach to the problem, and provides his own algorithm for solving it. The proposed solution can be adapted to situations where lending and borrowing rates differ.

The article presents criticism and commentary on the report "Some Basic Research into Historical Results Under Pension Plans With Stock Benefits Based on Common Stock Performance," by John C. Antliff and William C. Freund, included within the issue. The article's primary advocacy for the use of common stocks as long-term investment instruments is reviewed and supported. Specific comments are also offered citing several logistical obstacles to the implementation of the thesis, centering on the cost and attitude changes needed for insurance companies to benefit from the theory.

The article presents a response from E. Norman Bailey to commentary from Yutaka Imai and William Nelson (I&N) about his paper, "The Erroneous MEC Function," which appeared in the December, 1970 edition of the "Journal of Finance." Bailey asserts that I&N's criticisms were not germane to the specific issue addressed in his paper. He also believes their arguments embraced circumstances not commonly found in practice. Overall, in his view, I&N's presentation amounts to a tautology. He concludes by noting the irrelevance of a firm's marginal efficiency of capital function at the operational level.

The article presents views of authors about a comment on their article "Future Investment Opportunities and the Value of the Call Provision on a Bond." They note that the term "transaction costs" has come to have a rather imprecise catch-all connotation, but at least two separate categories might be distinguished. The first category might be termed "trading" costs and would encompass the costs of trading relatively homogeneous commodities on organized exchanges. Brokerage fees or bid-ask spreads, for example, would reflect trading costs. The second category might be called "negotiating" costs and would include any costs incurred by two parties in making and enforcing a contractual bargain, particularly in the case of non-standardized goods or services.

The comment by Professors Dyl and Long (DL) is, for the most part, an appropriate modification of our procedure for evaluating the abandonment of an investment project. We accept their principal point--in our original paper we omitted from consideration the possibility that future abandonment may be more desirable than either "present" abandonment or continuation of the project to the end of its economic life. In certain cases, deferral of abandonment to a future date may be the optimal alternative. [ABSTRACT FROM AUTHOR]

We explore a new channel for attracting inflows using a unique data set of corporate 401(k) retirement plans and their mutual fund family trustees. Families secure substantial inflows by being named trustee. We find that family trustees significantly overweight, and are reluctant to sell, their 401(k) client firm's stock. Trustee overweighting is more pronounced when the relationship is more valuable to the trustee family, and is concentrated in those funds receiving the greatest benefit from the inflows. We quantify this flow benefit and find that inclusion in the 401(k) plan has an economically and statistically large, positive effect on inflows. [ABSTRACT FROM AUTHOR]

Many argue that home bias arises because home investors can predict home asset payoffs more accurately than foreigners can. But why does global information access not eliminate this asymmetry? We model investors, endowed with a small home information advantage, who choose what information to learn before they invest. Surprisingly, even when home investors can learn what foreigners know, they choose not to: Investors profit more from knowing information others do not know. Learning amplifies information asymmetry. The model matches patterns of local and industry bias, foreign investments, portfolio outperformance, and asset prices. Finally, we propose new avenues for empirical research. [ABSTRACT FROM AUTHOR]

Severe flight to quality episodes involve uncertainty about the environment, not only risk about asset payoffs. The uncertainty is triggered by unusual events and untested financial innovations that lead agents to question their worldview. We present a model of crises and central bank policy that incorporates Knightian uncertainty. The model explains crisis regularities such as market-wide capital immobility, agents' disengagement from risk, and liquidity hoarding. We identify a social cost of these behaviors, and a benefit of a lender of last resort facility. The benefit is particularly high because public and private insurance are complements during uncertainty-driven crises. [ABSTRACT FROM AUTHOR]

We examine whether equity-linked private securities offerings are used as a mechanism for tunneling among firms that belong to a Korean chaebol. We find that chaebol issuers involved in intragroup deals set the offering prices to benefit their controlling shareholders. We also find that chaebol issuers (member acquirers) realize an 8.8% (5.8%) higher (lower) announcement return than do other types of issuers (acquirers) if they sell private securities at a premium to other member firms, and if the controlling shareholders receive positive net gains from equity ownership in issuers and acquirers. These results are consistent with tunneling within business groups. [ABSTRACT FROM AUTHOR]

I study whether the capital gains tax is an impediment to selling by some investors and if so, to what degree associated delayed selling affects stock prices. I find that selling decisions by institutions serving tax-sensitive clients are sensitive to cumulative capital gains, a pattern not observed for institutions with predominantly tax-exempt clients. Moreover, tax-related underselling impacts stock prices during large earnings surprises for stocks held primarily by tax-sensitive investors. The corresponding price reactions are less negative (more positive) with higher cumulative capital gains. This price pressure pattern is more severe when arbitrage is more costly. [ABSTRACT FROM AUTHOR]

This paper investigates the performance and capital inflows of private equity partnerships. Average fund returns (net of fees) approximately equal the S&P 500 although substantial heterogeneity across funds exists. Returns persist strongly across subsequent funds of a partnership. Better performing partnerships are more likely to raise follow-on funds and larger funds. This relationship is concave, so top performing partnerships grow proportionally less than average performers. At the industry level, market entry and fund performance are procyclical; however, established funds are less sensitive to cycles than new entrants. Several of these results differ markedly from those for mutual funds. [ABSTRACT FROM AUTHOR]

We show that a life-cycle model with realistically calibrated uninsurable labor income risk and moderate risk aversion can simultaneously match stock market participation rates and asset allocation decisions conditional on participation. The key ingredients of the model are Epstein–Zin preferences, a fixed stock market entry cost, and moderate heterogeneity in risk aversion. Households with low risk aversion smooth earnings shocks with a small buffer stock of assets, and consequently most of them (optimally) never invest in equities. Therefore, the marginal stockholders are (endogenously) more risk averse, and as a result they do not invest their portfolios fully in stocks. [ABSTRACT FROM AUTHOR]

This paper examines liquidity externalities by analyzing trading costs after hours. There is less than 1/20 as many trades per unit time after hours as during the trading day. The reduced trading activity results in substantially higher trading costs: quoted and effective spreads are three to four times larger than during the trading day. The higher spreads reflect greater adverse selection and order persistence, but not higher dealer profits. Because liquidity provision remains competitive after hours, the greater adverse selection and higher trading costs provide a direct measure of the magnitude of the liquidity externalities generated during the trading day. [ABSTRACT FROM AUTHOR]

We propose that stock-market participation is influenced by social interaction. In our model, any given "social" investor finds the market more attractive when more of his peers participate. We test this theory using data from the Health and Retirement Study, and find that social households--those who interact with their neighbors, or attend church--are substantially more likely to invest in the market than non-social households, controlling for wealth, race, education, and risk tolerance. Moreover, consistent with a peer-effects story, the impact of sociability is stronger in states where stock-market participation rates are higher. [ABSTRACT FROM AUTHOR]

We consider the optimal intertemporal consumption and investment policy of a constant absolute risk aversion (CARA) investor who faces fixed and proportional transaction costs when trading multiple risky assets. We show that when asset returns are uncorrelated, the optimal investment policy is to keep the dollar amount invested in each risky asset between two constant levels and upon reaching either of these thresholds, to trade to the corresponding optimal targets. An extensive analysis suggests that transaction cost is an important factor in affecting trading volume and that it can significantly diminish the importance of stock return predictability as reported in the literature. [ABSTRACT FROM AUTHOR]

I analyze the sensitivity of a firm's investment to its own cash flow in the benchmark case where financing is frictionless. This sensitivity has been proposed as a measure of financing constraints in earlier studies. I find that the investment--cash flow sensitivities that obtain in the frictionless benchmark are very similar, both in magnitude and in patterns they exhibit, to those observed in the data. In particular, the sensitivity is higher for firms with high growth rates and low dividend payout ratios. Tobin's q is shown to be a more noisy measure of near-term investment plans for these firms. [ABSTRACT FROM AUTHOR]

This paper examines the comovement of stocks with similar ticker symbols. For one such pair of firms, there is a significant correlation between returns, volume, and volatility at short frequencies. Deviations from "fundamental value" tend to be reversed within several days, although there is some evidence that the return comovement persists for longer horizons. Arbitrageurs appear to be limited in their ability to eliminate these deviations from fundamentals. This anomaly allows the observation of noise traders and their effect on stock prices independent of changes in information and expectations. [ABSTRACT FROM AUTHOR]

Diversified conglomerates are valued less than matched portfolios of pure-play firms. Recent studies find that this diversification discount results from conglomerates' inefficient allocation of capital expenditures across divisions. Much of this work uses Tobin's q as a proxy for investment opportunities, therefore hypothesizing that q is a good proxy. This paper treats measurement error in q . Using a measurement-error consistent estimator on the sorts regressions in the literature, I find no evidence of inefficient allocation of investment. The results in the literature appear to be artifacts of measurement error and of the correlation between investment opportunities and liquidity. [ABSTRACT FROM AUTHOR]

Motivated by recent financial crises in East Asia and the United States where the downfall of a small number of firms had an economy-wide impact, this paper generalizes existing reduced-form models to include default intensities dependent on the default of a counterparty. In this model, firms have correlated defaults due not only to an exposure to common risk factors, but also to firm-specific risks that are termed "counterparty risks." Numerical examples illustrate the effect of counterparty risk on the pricing of defaultable bonds and credit derivatives such as default swaps. [ABSTRACT FROM AUTHOR]

Stocks and other financial assets are traded at prices that lie on a fixed grid determined by the minimum tick size. Observed prices and quoted spreads do not correspond to the equilibrium prices and true spreads that would exist in a market with no minimum tick size. Using Monte Carlo Markov Chain methods, this paper estimates the equilibrium prices and true spreads. For large stocks, most of the quoted spread is attributable to the rounding of prices and the adverse selection component is small. The true spread and the adverse selection component are greater for mid-sized stocks. [ABSTRACT FROM AUTHOR]

We study the properties of unconditional minimum-variance portfolios in the presence of conditioning information. Such portfolios attain the smallest variance for a given mean among all possible portfolios formed using the conditioning information. We provide explicit solutions for n risky assets, either with or without a riskless asset. Our solutions provide insights into portfolio management problems and issues in conditional asset pricing. [ABSTRACT FROM AUTHOR]

This paper examines long-term block ownership by corporations and performance changes in firms with corporate block owners. We also examine potential reasons for corporate ownership including benefits in product market relationships, alleviation of financing constraints, and board monitoring by corporate owners. We find the largest significant increases in targets' stock prices, investment, and operating profitability when ownership is combined with alliances, joint ventures, and other product market relationships between purchasing and target firms, especially in industries with high research and development. Our findings are consistent with the conclusion that block ownership by corporations has significant benefits in product market relationships. [ABSTRACT FROM AUTHOR]

Recent papers show that predictability calibrated to U.S. data has a large effect on the rebalancing behavior of a multiperiod investor. We find that this continues to be true in the presence of realistic transaction costs. In particular, predictability causes the no-trade region for the risky-asset holding to become state dependent and, on average, wider and higher. Predictability also motivates the investor to spend considerably more on rebalancing and to rebalance more often. In other results, we find that introducing costly liquidation of the risky asset for consumption lowers the average allocation to the risky asset, though only marginally early in life. Our experiments also vary the nature of the return predictability and introduce return heteroskedasticity. [ABSTRACT FROM AUTHOR]

The goal of this paper is to show that normality of asset returns can be recovered through a stochastic time change. Clark (1973) addressed this issue by representing the price process as a subordinated process with volume as the lognormally distributed subordinator. We extend Clark's results and find the following: (i) stochastic time changes are mathematically much less constraining than subordinators; (ii) the cumulative number of trades is a better stochastic clock than the volume for generating virtually perfect normality in returns; (iii) this clock can be modeled nonparametrically, allowing both the time-change and price processes to take the form of jump diffusions. [ABSTRACT FROM AUTHOR]

The article comments on a paper by Wermers that showed the average mutual fund achieves gross annual returns that exceed a broad market index by 1.3%, but net returns that trail that index by 1%. Wermers attributed the difference to underperforming non-equity assets in the funds, but the author discerns other possibilities. Year-end "windows dressing" and tax-related trading frequently practiced by funds could be contributing factors. The author also points out the consequences of Wermers having included passive index funds in his sample.

This paper surveys the field of asset pricing. The emphasis is on the interplay between theory and empirical work and on the trade-off between risk and return. Modern research seeks to understand the behavior of the stochastic discount factor (SDF) that prices all assets in the economy. The behavior of the term structure of real interest rates restricts the conditional mean of the SDF, whereas patterns of risk premia restrict its conditional volatility and factor structure. Stylized facts about interest rates, aggregate stock prices, and cross-sectional patterns in stock returns have stimulated new research on optimal portfolio choice, intertemporal equilibrium models, and behavioral finance. [ABSTRACT FROM AUTHOR]

This paper examines the relation between the premium on closed-end funds and organizational features of the funds and advisors, including the compensation scheme of the investment advisor. We find that the fund premium is larger when: (a) the advisor's compensation is more sensitive to fund performance; (b) the assets managed by the advisor are concentrated in the fund in question; (c) the advisor manages other funds with low compensation sensitivity to performance and with low concentration of assets managed by the advisor; and (d) the advisor's compensation contract evaluates performance relative to a benchmark. [ABSTRACT FROM AUTHOR]

This paper shows that all traditional forms of the expectations hypothesis can be consistent with the absence of arbitrage if markets are incomplete. A key implication is that the validity of the expectations hypothesis is purely an empirical issue; the expectations hypothesis cannot be ruled out on a priori theoretical grounds. [ABSTRACT FROM AUTHOR]

This paper finds that trading volume is a significant determinant of the lead-lag patterns observed in stock returns. Daily and weekly returns on high volume portfolios lead returns on low volume portfolios, controlling for firm size. Nonsynchronous trading or low volume portfolio autocorrelations cannot explain these findings. These patterns arise because returns on low volume portfolios respond more slowly to information in market returns. The speed of adjustment of individual stocks confirms these findings. Overall, the results indicate that differential speed of adjustment to information is a significant source of the cross-autocorrelation patterns in short-horizon stock returns. [ABSTRACT FROM AUTHOR]

In this paper we analyze the theoretical implications of sorting data into groups and then running asset pricing tests within each group. We show that the way this procedure is implemented introduces a bias in favor of rejecting the model under consideration. By simply picking enough groups to sort into, the true asset pricing model can be shown to have no explanatory power within each group. [ABSTRACT FROM AUTHOR]

The value premium in U.S. stock returns is robust. The positive relation between average return and book-to-market equity is as strong for 1929 to 1963 as for the subsequent period studied in previous papers. A three-factor risk model explains the value premium better than the hypothesis that the book-to-market characteristic is compensated irrespective of risk loadings. [ABSTRACT FROM AUTHOR]

This paper studies how market closures affect investors' trading policies and the resulting return-generating process. It shows that closures generate rich patterns of time variation in trading and returns, including those consistent with empirical findings: (1) U-shaped patterns in the mean and volatility of returns over trading periods, (2) higher trading activity around the close and open, (3) more volatile open-to-open returns than close-to-close returns, (4) higher returns over trading periods than over nontrading periods, (5) more volatile returns over trading periods than over nontrading periods. It also shows that closures can make prices more informative about future payoffs. [ABSTRACT FROM AUTHOR]

Finance theory can be used to form informative prior beliefs in financial decision making. This paper approaches portfolio selection in a Bayesian framework that incorporates a prior degree of belief in an asset pricing model. Sample evidence on home bias and value and size effects is evaluated from an asset-allocation perspective. U.S. investors' belief in the domestic CAPM must be very strong to justify the home bias observed in their equity holdings. The same strong prior belief results in large and stable optimal positions in the Fama-French book-to-market portfolio in combination with the market since the 1940s. [ABSTRACT FROM AUTHOR]

This paper develops a nonparametric approach to examine how portfolio and consumption choice depends on variables that forecast time-varying investment opportunities. I estimate single-period and multiperiod portfolio and consumption rules of an investor with constant relative risk aversion and a one-month to 20-year horizon. The investor allocates wealth to the NYSE index and a 30-day Treasury bill. I find that the portfolio choice varies significantly with the dividend yield, default premium, term premium, and lagged excess return. Furthermore, the optimal decisions depend on the investor's horizon and rebalancing frequency. [ABSTRACT FROM AUTHOR]

This paper presents an exact finite-sample statistical procedure for testing hypotheses about the weights of mean-variance efficient portfolios. The estimation and inference procedures on efficient portfolio weights are performed in the same way as for the coefficients in an OLS regression. OLS t- and F-statistics can be used for tests on efficient weights, and when returns are multivariate normal, these statistics have exact t and F distributions in a finite sample. Using 20 years of data on 11 country stock indexes, we find that the sampling error in estimates of the weights of a global efficient portfolio is large. [ABSTRACT FROM AUTHOR]