60 results
Search Results
2. COMMENT: SOME EVIDENCE ON THE EFFECT OF COMPANY SIZE ON THE COST OF EQUITY CAPITAL.
- Author
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Goudzwaard, Maurice B.
- Subjects
BUSINESS size ,CAPITAL costs ,SIZE of industries ,HYPOTHESIS ,RATE of return ,CAPITAL market - Abstract
The article presents comments of the author on the paper "Some Evidence on the Effect of Company Size on the Cost of Equity Capital," by W.W. Alberts and S.H. Archer. The article states that the authors provide a valuable addition to the understanding of capital markets and how resources are allocated to firms of different asset sizes. Their hypothesis is that the cost of equity capital to smaller firms is higher than it is to larger industrial firms. They test their hypothesis by analyzing the variability of returns of 658 industrial firms and attempt to determine whether variability of return is inversely related to asset size.
- Published
- 1973
- Full Text
- View/download PDF
3. COMMENT-- THE CAPITAL GROWTH MODEL: AN EMPIRICAL INVESTIGATION.
- Author
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Gonzalez, Nestor
- Subjects
MATHEMATICAL models of capital ,MONTE Carlo method ,RATE of return ,ASSETS (Accounting) ,INVESTMENTS ,SECURITIES ,SECURITIES trading - Abstract
The article presents comments from the author on the paper "The Capital Growth Model: An Empirical Investigation," by James L. Bicksler and Edward Thorp. The author explains that because this comment should be essentially addressed to Bicksler's and Thorp's own research and results, he does not consider those pages that contain authors' interpretation of prior studies. He states that Bicksler and Thorp examine the short-run properties of the optimal growth model using the Monte Carlo simulation.
- Published
- 1973
- Full Text
- View/download PDF
4. SYSTEMATIC RISK AND THE HORIZON PROBLEM.
- Author
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Cheng, Pao L. and Deets, M. King
- Subjects
SECURITIES ,RISK ,MARKET equilibrium ,CAPITAL ,RATE of return ,STOCK transfer - Abstract
In so far as the concept of systematic risk is predicated on the Sharpe-Lintner theory of capital market equilibrium [5, 4], the time-horizon of systematic risk must conform with the time-horizon of market equilibrium. Since it has been suggested that market equilibrium is instantaneous [3, p. 188], it would follow that systematic risk should also be instantaneous. This paper is, therefore, concerned with the evaluation and measurement of instantaneous risk. Although Jensen [3] has made a similar attempt in a much larger study, we have reason to believe it is not satisfactory. We shall then begin in Section I by discussing Jensen's approach to the horizon problem. In Section II, an alternative procedure of evaluating systematic risk is suggested. Section III concludes the paper by comparing estimates of instantaneous risks based upon weekly returns of 30 Dow-Jones stocks. The motivation behind the paper is obvious. A correct formulation of instantaneous systematic risk is not only a logical extension of the capital market equilibrium theory but is also a yardstick for measuring portfolio performance in terms of risk and return. [ABSTRACT FROM AUTHOR]
- Published
- 1973
- Full Text
- View/download PDF
5. SOME EVIDENCE ON THE EFFECT OF COMPANY SIZE ON THE COST OF EQUITY CAPITAL.
- Author
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Alberts, W. W. and Archer, S. H.
- Subjects
CAPITAL costs ,SMALL business ,SIZE of industries ,BUSINESS enterprises ,RATE of return ,HYPOTHESIS - Abstract
The article presents evidence on the effect of company size on the cost of equity capital. The authors state that the goal of the paper presented is to carry out tests of the general hypothesis, urged by scholars F.M. Scherer and J.F. Weston and E.F. Brigham, that the cost-of-equity capital of small industrial corporations is greater than that of large industrial corporations. They explain that the paper denotes this cost as k
e and defines it as the expected rate of return on the stock of a company when the current price of the stock is in equilibrium.- Published
- 1973
- Full Text
- View/download PDF
6. A TIME-STATE-PREFERENCE MODEL OF SECURITY VALUATION.
- Author
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Myers, Stewart C.
- Subjects
MARKET value ,RATE of return ,SECURITIES ,ECONOMIC equilibrium ,UNCERTAINTY ,VALUATION - Abstract
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. This paper presents a model of security valuation in which uncertainty takes the central role. The model is based on the requirements for equilibrium in a world in which uncertainty is described by a set of possible event-sequences, or states of nature. This "time-statepreference" framework is a generalized version of that used in articles by Arrow, Debreu, and Hirshleifer, as well as in several more recent studies. The valuation formulas presented here are, of course, imperfect. They cannot be represented as handy empirical tools. On the theoretical front, moreover, new results and new problems seem always to arrive band in band. Although the problems are duly noted, the time-state-preference model will be defended as a plausible approximation and a useful analytical tool. The paper is organized as follows. The basic time-state-preference model is derived in Section II. This requires careful statement, of the assumed market characteristics and the constraints on investors' strategies: although the general characteristics of the formulas obtained are intuitively appealing, their precise form is sensitive to the range of trading opportunities open to investors. The Kuhn-Tucker conditions are used to obtain the necessary conditions for equilibrium. In Section III, the special case discussed by other authors is related to my more general model. Some implications are considered in Section IV. Finally, I consider the possible effects of "the interdependence of investors' strategies," which arise whenever the value of a security to an investor depends on other investors' beliefs and market strategies. This interdependence leads to price uncertainty, which greatly complicates the necessary conditions for... [ABSTRACT FROM AUTHOR]
- Published
- 1968
- Full Text
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7. COMMENT: SYSTEMATIC INTEREST-RATE RISK IN A TWO-INDEX MODEL OF RETURNS.
- Author
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Korkie, Bob M.
- Subjects
INTEREST rate risk ,RATE of return ,MATHEMATICAL models ,CAPITAL assets pricing model ,PRICE inflation - Abstract
The article reports on interest rate risk and discusses the paper "Systematic Interest-Rate Risk in a Two-Index Model of Returns," by Bernell K. Stone. Stone extends the single-factor market model into a two-index model so that he can improve the explanation of the stochastic process which creates security returns. The creation of the two-factor market model is so that the components of systematic or covariance risk not explained by the single model can be examined. The factors of Stone's model are the return on an equity index and the return on a bond index.
- Published
- 1974
- Full Text
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8. EXTRA-MARKET COMPONENTS OF COVARIANCE IN SECURITY RETURNS.
- Author
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Rosenberg, Barr
- Subjects
SECURITIES ,RATE of return ,SECURITIES industry ,FINANCIAL statements ,INVESTMENT analysis ,BETA (Finance) - Abstract
This study is concerned with the multiple-factor model of security returns, with its implications for a single-factor, market-index model applied to the same securities, and with statistical methods of estimating the parameters of a multiple-factor model and thereby operationalizing it. This part of the paper sets out the approach. The sequel will present the empirical results. The results show that there are highly significant extra-market components of covariance among security returns; moreover, these risk components are such that the loadings of individual security returns on the factors are determined by observable characteristics of the firm: income statement and balance sheet data, industry membership, and historical behavior of returns on the security. The results also show that the conventional security beta is a function of these same characteristics. [ABSTRACT FROM AUTHOR]
- Published
- 1974
- Full Text
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9. THE VARIATION OF THE RETURN ON STOCKS IN PERIODS OF INFLATION.
- Author
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Oudet, Bruno A.
- Subjects
EFFECT of inflation on investments ,STOCKS (Finance) ,RATE of return ,DEBT-to-equity ratio ,STOCK prices ,PRICE inflation - Abstract
The bear market of the late sixties amidst inflation has led to growing concern over the validity of the proposition that stocks provide a good hedge against inflation. Conflicting arguments have been raised on both sides of the issue but a synthesis has as yet failed to emerge. The gains resulting from a careful assessment of the various propositions are obvious. If stock prices are adversely affected by inflation, the financial analyst must search for other hedges against the erosion of the purchasing power of money, while the economist must note that inflation has a depressing effect on economic growth through the rise of the cost of capital. This paper attempts to advance the assessment of variations in the returns on stock investments during periods of inflation. The analysis is carried out in three steps. First, the principal arguments used to explain variations of stock prices in periods of inflation are reviewed in the framework of the traditional stock-valuation model. Empirical evidence is then presented showing the behavior of stock returns in recent inflations. Finally, a simultaneous two-equation model that permits one to estimate the effect on stock returns of the variables involved is specified. The reduced-form equations ultimately estimated clearly show that inflation had a negative effect on stock returns in the last two decades. [ABSTRACT FROM AUTHOR]
- Published
- 1973
- Full Text
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10. THE INTERDEPENDENT STRUCTURE OF SECURITY RETURNS.
- Author
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Simkowitz, Michael A. and Logue, Dennis E.
- Subjects
SECURITIES ,RATE of return ,EQUATIONS ,CAPITAL assets pricing model ,MARKETS ,CORPORATIONS ,SECURITIES trading - Abstract
In this paper the traditional capital asset pricing model is reformulated as a system of simultaneous equations in which returns on similar securities are treated as endogenous variables and in which pertinent financial data for particular firms and a market factor are treated as exogenous variables. Such a system is estimated, and serious questions are raised concerning the tenability of the simple linear model so often used to explain capital asset prices under uncertainty. This paper offers a robust test of the capital asset pricing model (e.g., Sharpe [12] and [13] and Fama [3]) assumption which asserts that all of the inter- dependencies among security returns are accounted for solely by the relationship between a single security and a common market index. Also, it examines the relationship of security returns and corporate operating data to determine the extent to which the beta of the capital asset pricing model is simply a summary, surrogate measure for them. The proposed test is based on a simultaneous equation model. Two goals are sought through this research which, first, serves as a direct test of important implications of the capital asset pricing model and which, second, will provide approximations of the magnitude and direction of any biases that may exist in estimates of beta obtained from single index models. [ABSTRACT FROM AUTHOR]
- Published
- 1973
- Full Text
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11. DISCUSSION (Dale D. McFarlane).
- Author
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McFarlane, Dale D.
- Subjects
RATE of return ,RISK assessment ,INVESTMENT analysis ,RESEARCH evaluation - Abstract
The article presents the commentary on the methodology and results of the report "The Measurement of Systematic Risk for Securities and Portfolios: Some Empirical Results," by Nancy Jacob, included within the issue. Elements of the research which positively contribute to the continuing study of risk-return relationships in security portfolios are noted and discussed. Evaluation is also given to several computations, offering corrections and adaptations.
- Published
- 1971
- Full Text
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12. DISTRIBUTION MOMENTS AND EQUILIBRIUM: REPLY.
- Author
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Jean, William H.
- Subjects
INVESTMENT analysis ,DISTRIBUTION (Economic theory) ,PORTFOLIO management (Investments) ,RATE of return ,RISK assessment ,INVESTORS - Abstract
This article presents the author's reply to a comment made about the paper "Distribution Moments and Equilibrium." The author clears up a misinterpretation that was made in the comment about the assumed choice an investor makes. The author presents a new diagram showing the changes the occur as investors change their holdings of a risk-free security. The author also addresses the conclusion made in the note which relates to an investor expanding their borrowings and portfolio indefinitely. The author presents an additional diagram refuting this notion.
- Published
- 1972
- Full Text
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13. THE TRADITIONAL APPROACH TO VALUING LEVERED-GROWTH STOCKS: A CLARIFICATION.
- Author
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Hauqan, Robert A. and Kumar, Prem
- Subjects
CORPORATE finance ,QUANTITATIVE research ,MATHEMATICAL models of economic development ,RATE of return ,CAPITAL costs ,MARKET value - Abstract
This paper attempts to shed some light on an interesting issue in the theory of finance of the firm. The issue concerns the applicability of Modigliani and Miller's (M-M) Propositions I and II [21, 22, and 23] to the growth firm, a firm which earns a rate of return on invested assets in excess of its cost of capital. M-M's Proposition I states that, in the absence of taxes, S + M = &Xmacr;/k[sub u] u where S = the market value of the outstanding stock of the firm, M = the market value of the outstanding bonds of the firm, &Xmacr; = expected dollar return on the assets of the firm before the deduction of interest payments, k[sub u] = the capitalization rate appropriate for the uncertain and unlevered streams of earnings of finns in the given risk class. Then given the following identify [21, equation (9), p. 271], &Xmacr; - iM s where i is the rate of return on riskless bonds, and k is the levered-capitalization rate, M-M derive. Proposition II which is k = k[sub u] + (k - i)[sup M/S]. The reader should note that the identity used in deriving Proposition II holds only in the absence of growth opportunities where market and book values are equal. It is therefore inviting to construe from this that the propositions have limited significance for the growth firm. [ABSTRACT FROM AUTHOR]
- Published
- 1974
- Full Text
- View/download PDF
14. THE MARKET MODEL APPLIED TO EUROPEAN COMMON STOCKS: SOME EMPIRICAL RESULTS.
- Author
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Pogue, Gerald A. and Solnik, Bruno H.
- Subjects
ECONOMIC models ,EUROPEAN corporations ,INTERNATIONAL business enterprises ,STOCK prices ,DIVIDENDS ,RATE of return ,FINANCE - Abstract
This article focuses on the results of some tests of the market model for a broad cross-section of the European common stocks. The authors' database has daily price and dividend data of 229 stocks from seven European countries. The authors have included a sample of 65 American securities for comparison reasons. Regression analysis was used to estimate the model's parameters for various return measurement figures and test periods. The paper is structured as follows: a review of the market model, a description of the database, the methodology, the empirical results, and the implications for market efficiency.
- Published
- 1974
- Full Text
- View/download PDF
15. THE INTERPRETATION OF THE GEOMETRIC MEAN: A NOTE.
- Author
-
Hodges, Stewart and Schafer, Stephen
- Subjects
PRICES of securities ,STOCK prices ,RATE of return ,PORTFOLIO management (Investments) ,INVESTMENTS ,EFFICIENT market theory - Abstract
It has been said [2,4,5,6,7, and 8], and it seems to be widely accepted, that the geometric mean of the price relatives of a group of securities can be interpreted as the return which would have been earned on a portfolio of those securities, managed continuously over time to maintain an equal money investment in each security. This is a theoretical concept which could not be implemented literally by a portfolio manager, but it can still be treated rigorously in a mathematical sense. In a recent paper in this journal Rothstein [8] defined continuous reallocation as the limiting case of a policy which does have an operational definition. He showed that the index corresponding to a policy of the equalization of dollar investments approaches the geometrically averaged index as its limiting value. We shall argue that this interpretation of the geometric mean is a misleading one, since it depends upon assumptions which imply serious market inefficiencies. The return from a "buy-and-hold" policy starting from equal investments in the different securities is given by the arithmetic mean of the price relatives of the securities. But the arithmetic mean is never less than the geometric mean, and is usually greater than it, so the policy of continuous reallocation appears to be a recipe for losing money. While this is less useful than rules for making money, it seems to suggest that such rules might exist and conflicts with the usual ideas of an efficient market. [ABSTRACT FROM AUTHOR]
- Published
- 1974
- Full Text
- View/download PDF
16. IMPUTING EXPECTED SECURITY RETURNS FROM PORTFOLIO COMPOSITION.
- Author
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Sharpe, William F.
- Subjects
SECURITIES ,INVESTMENTS ,RATE of return ,ESTIMATES ,INVESTMENT analysis ,FINANCIAL ratios - Abstract
The normative procedures of Markowitz, Sharpe, and others can be utilized to determine an optimal portfolio (set of security holdings) given estimates of risk, relevant constraints, and expected returns on securities. Building on these foundations, the positive models of Sharpe, Lintner, Mossin, and others assume that investors form portfolios as if they were following such procedures. We observe considerable differences in portfolio composition, some of which undoubtedly stem from differences in expectations. Yet the predictions of most investors are either made implicitly or, if made explicitly, are jealously guarded and hence cannot be observed by outsiders. This paper shows how some crude estimates of an investment organization's expected returns might be imputed from its holdings of securities. Such values could prove interesting to others if in fact they represent the true expectations reasonably well. Alternatively, the organization could utilize such estimates itself in an iterative manner to improve its portfolio. Given a set of holdings, the implicit expected returns could be computed, then shown to the organization's analysts. Discrepancies could be used to suggest modifications in relative holdings. The revised portfolio could then be subjected to the same analysis, leading to a new set of implicit expected returns with the process repeated as many times as appears useful. [ABSTRACT FROM AUTHOR]
- Published
- 1974
- Full Text
- View/download PDF
17. OBJECTIVES AND PERFORMANCE OF MUTUAL FUNDS, 1960-1969.
- Author
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McDonald, John G.
- Subjects
MUTUAL funds ,RATE of return ,INDUSTRIAL productivity ,STOCK exchanges ,RISK sharing - Abstract
The purpose of this study is to measure and evaluate the objectives, risk, and return of 123 American mutual funds using monthly returns in the period 1960-1969. The paper considers five questions: How were stated fund objectives related to risk and return, as measured over the subsequent decade? How did funds of various objectives perform in terms of return and return-to-risk measures? Did average excess return increase with risk? Was the return-to-risk performance of the average mutual fund better or worse than that of the stock market as a whole? How did the slope of the mutual fund line of returns versus beta compare to the capital market line; i.e., did funds at one end of the risk spectrum appear to "outperform" those at the other end? The capital asset pricing model of Sharpe, Lintner, and Mossin relates the expected return on a security or portfolio to its systematic risk (beta)—a function of its covariance with the market return for risky assets—and to the expected return on the market portfolio. In an application to performance measurement, Sharpe demonstrated that average return was positively related to variability of return using annual data for mutual funds in the 1954-1963 period. Jensen extended the capital asset pricing model to show expected excess return on a security or portfolio as a function of its systematic risk and the realized excess return on the market portfolio, and he found that fund return was positively related to beta using annual returns in the period 1945-1964. Jensen also found that funds at the low-end of the risk spectrum tended to "outperform" higher-risk funds in the 1955-1964 period, in terms of expected returns predicted by the Sharpe-Lintner model at each fund's risk level. Looking directly at the long-term risk-return relationship, Black, Jensen, and Scholes found that the average realized return on simulated portfolios of common stocks grouped by measured beta was positively related to risk in the period... [ABSTRACT FROM AUTHOR]
- Published
- 1974
- Full Text
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18. A TOTAL REAL ASSET PLANNING SYSTEM.
- Author
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Merville, L. J. and Tavis, L. A.
- Subjects
CAPITAL investments ,ASSETS (Accounting) ,RATE of return ,FINANCIAL planning ,WORKING capital ,ASSET management - Abstract
Traditional planning for working capital needs is typically conducted with a relatively short time horizon. In this process, management attempts to optimize the return on existing fixed assets. The period for capital investment planning is much longer, reflecting the irreversibility of these decisions. Current research in the two areas tends to dichotomize these decision processes. The implications seem to be that working capital policies only have impact in the short run. However, it is clear that cash flows for potential capital expenditures are based on assumptions relative to expected future demand and production to meet this demand—assumptions that are necessarily tied to working capital commitments in the long run. The overall planning for credit, inventory, and liquidity should, therefore, be carried out before, or simultaneously with, the capital investment decision. It is a planning requirement that becomes an integral part of the total asset planning system. The vast majority of existing working capital models or long-term capital planning models do not allow for the explicit existence of and the simultaneous interrelationships between these two important subsystems. The research reported in this paper deals directly with a time interlocked planning system wherein optimal credit, inventory, and borrowing decisions are selected such that optimal levels of working capital and fixed capital occur. Since the results of these decisions are so closely related, the ties must be recognized. Hence, they will be combined and analyzed in the context of a "total real asset planning" (TRAP) model. In the model, a clear distinction will be made between working capital and capital budgeting decisions. [ABSTRACT FROM AUTHOR]
- Published
- 1974
- Full Text
- View/download PDF
19. SOME PORTFOLIO-RELEVANT RISK CHARACTERISTICS OF LONG-TERM MARKETABLE SECURITIES.
- Author
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McEnally, Richard W.
- Subjects
SECURITIES industry ,INVESTMENTS ,RATE of return ,SECURITIES ,STOCKS (Finance) ,SECURITIES trading - Abstract
The attractiveness of a security in a portfolio context depends upon both the raturns it is expected to generate and the interrelationship of these returns with those of other securities in the portfolio. Return relationships may be appraised directly; they may also be examined indirectly by reference to the relationship between the individual return streams and an external factor. The investigation discussed in the first section of this paper suggests that there is some evidence that the ex post return volatility with respect to changes in the level of business activity increases algebraically as one moves from U.S. government bonds to corporate bonds, preferred stock, public utility common stock, and finally to industrial common stock. Despite the consistency of this rank ordering with a priori conceptions of security riskiness, direct estimation of security return interrelationships is found to be more useful for the construction of diversified portfolios. Assuming that the 1951-1968 experience is in fact representative of the "true" return interrelationships, a proposition, which has been suggested by others, is confirmed empirically — the return variability or "risk" of portfolios composed solely of low risk security types may be reduced by diversification of the portfolio with security types which in isolation are considered to be high in risk. More specifically, the empirical investigation suggests that the return variability of portfolios of government bonds and/or corporate bonds may be reduced by the judicious introduction of industrial common stocks into the portfolios. At the other end of the risk spectrum, there is some evidence that the risk of common stock portfolios may be reduced most economically (in terms of foregone returns) by diversification with government bonds. Perhaps the most interesting aspect of these results focuses on the extent to which government bonds and common stocks meld well together in a portfolio, whereas corporate... [ABSTRACT FROM AUTHOR]
- Published
- 1973
- Full Text
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20. ASSET SELECTION WITH CHANGING CAPITAL STRUCTURE.
- Author
-
Elton, Edwin J. and Gruber, Martin J.
- Subjects
INVESTMENTS ,RATE of return ,DEBT ,CAPITAL structure ,DIRECT costing ,TRANSACTION costs - Abstract
One of the major problems in finance is that of combining the separate costs of debt and equity into an appropriate cutoff rate for new investment; this problem is particularly acute when the firm is changing its capital structure. Solutions to this problem which have been proposed include various types of both marginal costing and average costing. The purpose of this paper is to derive the appropriate cutoff rate for new investment. We will start by introducing the concept of corporate security repurchase. This provides us with a mechanism through which capital structure can be instantaneously adjusted. Employing this mechanism, we will show that, in the absence of transaction costs and taxes, moving to an optimal capital structure (minimizing capital costs) is identical with maximizing stockholder wealth. This in turn allows us to calculate the correct cutoff rate for accepting new investments. The appropriate cutoff rate will be defined first in the absence of transaction costs. Then transaction costs and taxes will be introduced and the analysis suitably modified. [ABSTRACT FROM AUTHOR]
- Published
- 1973
- Full Text
- View/download PDF
21. DISCUSSION (David H. Pyle).
- Author
-
Pyle, David H.
- Subjects
BONDS (Finance) ,RATE of return ,TIME series analysis ,MULTIVARIATE analysis ,RESEARCH evaluation - Abstract
The article presents comments on the results and methodology of the report "A Multivariate Time-Series Investigation of Annual Returns on Highest Grade Corporate Bonds," by Donald L. Tuttle and William L. Wilbur, included within the issue. The author asserts the ad-hoc nature of the report's equations and suggests further explanation and validation is needed of the correlation model selected.
- Published
- 1971
- Full Text
- View/download PDF
22. Risk-Return Relationships in Regional Securities Markets.
- Author
-
Upson, Roger B. and Jessup, Paul F.
- Subjects
RISK-return relationships ,FINANCIAL markets ,OVER-the-counter markets ,RATE of return ,VALUATION - Abstract
This paper analyzes risk-return relationships in regional and national securities markets. Specifically, it presents methods and results of an investigation of simulated portfolios of common stocks traded on the Minnesota over-the-counter (OTC) market and the New York Stock Exchange (NYSE). [ABSTRACT FROM PUBLISHER]
- Published
- 1970
- Full Text
- View/download PDF
23. COMMENT: FINANCIAL FACTORS WHICH INFLUENCE BETA VARIATIONS WITHIN AN HOMOGENEOUS INDUSTRY ENVIRONMENT.
- Author
-
Gordon, Edward
- Subjects
FACTOR analysis ,ELECTRIC utilities ,RISK ,RATE of return ,BETA (Finance) - Abstract
Professor Melicher has conducted an interesting study of the effects of financial factors on beta coefficients and their variations. He reduced the perennial multicollinearity problem by using a factor analysis to screen the financial variables used in the statistical analysis. This study is another in the growing body of literature concerned with beta coefficients as measures of risk. My comments on this paper will consider separately (1) the research design {i.e., what the study directly covered), and (2) the inferences drawn by the author versus what the beta coefficients and their variation really do measure. [ABSTRACT FROM AUTHOR]
- Published
- 1974
- Full Text
- View/download PDF
24. SYSTEMATIC INTEREST-RATE RISK IN A TWO-INDEX MODEL OF RETURNS.
- Author
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Stone, Bernell K.
- Subjects
INTEREST rate risk ,INVESTMENTS ,RATE of return ,MATHEMATICAL models ,SECURITIES ,STOCK exchanges - Abstract
The article reports on systematic interest rate risk in a two index model of returns. Also discussed are the changes in interest rates, changes in the level of equity market, bonds, and money managers. The two-index model developed includes return on the equity and debt markets through quantification of systematic interest rate risk, improving the concept of equity risk, and expanding the asset class.
- Published
- 1974
- Full Text
- View/download PDF
25. USING THE CAPITAL ASSET PRICING MODEL AND THE MARKET MODEL TO PREDICT SECURITY RETURNS.
- Author
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Pettit, R. Richardson and Westerfield, Randolph
- Subjects
INVESTMENTS ,CAPITAL assets pricing model ,VARIANCES ,RATE of return ,STOCK exchanges ,ASSETS (Accounting) - Abstract
The article discusses security returns through the use of a capital asset pricing model as well as the market model. The two models are used to predict the rate of returns for securities. The capital asset pricing model contains a single period, mean-variance theory of equilibrium expected return and the market model posits a linear relationship between individual securities' returns and returns for a portfolio of all assets.
- Published
- 1974
- Full Text
- View/download PDF
26. AN INTERNATIONAL MARKET MODEL OF SECURITY PRICE BEHAVIOR.
- Author
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Solnik, Bruno H.
- Subjects
STOCK prices ,PRICES of securities ,INDUSTRIAL organization (Economic theory) ,PRICE indexes ,RATE of return ,CAPITAL assets pricing model - Abstract
The article discusses security price behavior through the use of an international market model. The model is used with the assumption that the return of a security is a linear function of the return for the world market portfolio. Empirical research and stochastic analysis was applied to a sampling of 299 common stocks in eight major European countries and the U.S. Also, the capital asset pricing model is used.
- Published
- 1974
- Full Text
- View/download PDF
27. A NOTE ON MEASUREMENT OF SKEWNESS.
- Author
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Fogler, H. Russell and Radcliffe, Robert C.
- Subjects
PORTFOLIO management (Investments) ,INVESTMENT analysis ,RATE of return ,STANDARD deviations ,DISTRIBUTION (Probability theory) ,ANALYSIS of variance - Abstract
Certainly, the concept of skewness of returns and its role in the context of portfolio analysis has gained increasing attention in recent literature. Witness the studies by Alderfer and Bierman, Arditti, Jean, and Simonson. Each of these studies has treated skewness as the third moment of a series expansion—accordingly, skewness has been measured and interpreted as a logical extension of the traditional two-dimensional return-versus-standard deviation analysis of security evaluation. The purpose of this note is to illustrate that the measurement of skewness is more sample sensitive than similar measurements for the mean and standard deviation. In particular, skewness measures will be shown to be highly sensitive to both the size of the differencing interval and the initialization point. [ABSTRACT FROM AUTHOR]
- Published
- 1974
- Full Text
- View/download PDF
28. ANOTHER LOOK AT MUTUAL FUND PERFORMANCE.
- Author
-
Arditti, Fred D.
- Subjects
MUTUAL funds ,FINANCIAL performance ,MATHEMATICAL models of investments ,STOCK price indexes ,RATE of return - Abstract
The article presents a re-evaluation of the research conclusions published by William F. Sharpe, claiming mutual fund performances to be consistently inferior to market indices. Sharpe's reward-to-variability ratio measure is described and his conclusions reviewed, but an additional factor denoting the direction and size of a distribution's tail is produced, altering the final conclusion against mutual funds.
- Published
- 1971
- Full Text
- View/download PDF
29. TARGET RATES OF RETURN AND CORPORATE ASSET AND LIABILITY STRUCTURE UNDER UNCERTAINTY.
- Author
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Litzenberger, R. H. and Joy, O. M.
- Subjects
CAPITAL ,LINEAR programming ,OPTIMAL designs (Statistics) ,FINANCIAL management ,INVESTMENT policy ,RATE of return - Abstract
The article presents an exploration into a corporate division multiperiod capital allocation problem with considerations of ex post financial evaluation by its parent company. Questions are raised regarding the construction of an optimal design of productive assets and debt security structure mixing, all based within the context of the overriding goal of meeting a set target rate of return. A deterministic equivalent linear programming model is presented through zero-order decision ruling to solve the scenario.
- Published
- 1971
- Full Text
- View/download PDF
30. CORPORATE INVESTMENT CRITERIA AND THE VALUATION OF RISK ASSETS.
- Author
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Litzenberger, Robert B. and Budd, Alan F.
- Subjects
VALUATION ,RISK ,ASSETS (Accounting) ,CAPITAL costs ,RATE of return ,MARKET prices - Abstract
The article focuses on the valuation of risk assets and the investment criteria of corporations. It states that a normative theory of capital budgeting requires a determination of the correct capital costs to allow for the selection and evaluation of risky investments. It mentions that a positive theory of market equilibrium for risk assets is the basis of the normative theory, and that a firm can thus determine a risk's market price through the observation of the nondiversifiable risk and the risk's current required rate of return.
- Published
- 1970
- Full Text
- View/download PDF
31. SMALL BUSINESS AND THE NEW ISSUES MARKET FOR EQUITIES.
- Author
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Stoll, Hans R. and Curley, Anthony J.
- Subjects
STOCKS (Finance) ,SMALL business ,RATE of return ,INVESTMENTS ,INVESTORS - Abstract
The article focuses on the use of outside equity in financing small and new businesses. It states that equity gap can exist if the cost of funds for a small business is larger than that of a large business of the same risk class, which may reflect a systematic overestimation of risk, an underestimation of return of small firms by the public, or capital rationing. The article states there is no evidence of an equity gap and that the long-run rates of return on investments are no greater between small or large businesses. It mentions that short run price appreciation was significantly greater than the index appreciation.
- Published
- 1970
- Full Text
- View/download PDF
32. THE DISCOUNT RATE PROBLEM IN CAPITAL RATIONING SITUATIONS: COMMENT.
- Author
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Lockett, A. Geoffrey and Tomkins, Cyril
- Subjects
DISCOUNT prices ,LINEAR programming ,PORTFOLIO management (Investments) ,CORPORATE debt financing ,RATE of return ,MATHEMATICAL models - Abstract
The authors comment on the paper "The Discount Rate Problem in Capital Rational Situations," by Lusztig and Schwab (L&S), concerning the application of linear programming methods to portfolio selection. They state that L&S failed to define "the most attractive portfolio foregone" and that if attention is confined to linear programming, the implication is that every project being considered can be infinitely divided. They present a mathematical model of an investor establishing a capital expenditure program for a new business for its first five years, avoiding debt financing during those five years, and show that the L&S procedure only selects the project with the greatest internal rate of return.
- Published
- 1970
- Full Text
- View/download PDF
33. COMMENT: THE INTERDEPENDENT STRUCTURE OF SECURITY RETURNS.
- Author
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Rush, David F.
- Subjects
SECURITIES ,RATE of return ,CAPITAL assets pricing model ,CAPITAL market ,INVESTMENTS ,RISK - Abstract
The article presents comments of the author on the paper "The Interdependent Structure of Security Returns," by Michael A. Simkowitz and Dennis E. Logue. The author states that Simkowitz and Logue suggest that capital asset pricing is a simultaneous process. He states that their approach is different than traditional capital market models in which an investment's risk and return characteristics depend strictly on a structural relationship between asset and market portfolio returns. Simkowitz and Logue argue that within groups of homogeneous securities, investment returns are determined simultaneously.
- Published
- 1973
- Full Text
- View/download PDF
34. Investment Market, 1870-1914: The Evolution of a National Market.
- Author
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Davis, Lance E.
- Subjects
CAPITAL ,RATE of return ,INVESTMENTS - Abstract
Provides some quantitative measures of the barriers to interregional capital mobility during the period of 1870-1914. Overview of the classical model of resource allocation; Factors affecting returns on investments; Problems with capital mobility in the United States and Great Britain.
- Published
- 1965
- Full Text
- View/download PDF
35. THE RELIABILITY OF ESTIMATION PROCEDURES IN PORTFOLIO ANALYSIS.
- Author
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Dickinson, J. P.
- Subjects
INVESTMENT analysis ,PORTFOLIO management (Investments) ,RATE of return ,ESTIMATES ,ESTIMATION theory ,STATISTICAL sampling - Abstract
The Markowitz model for the efficient diversification of investments has, over the years since its original formulation, provided the basis for many investigations into the question of portfolio selection. Amongst the more notable contributions to the theory are the works of Fama and Mandelbrot, Smith, Latané, Arditti, and Blume. Perhaps the most significant work, however, was tarried out by Sharpe. He criticized the basic Markowitz theory on the grounds of its extremely complex and unwieldy nature when applied in a practical situation involving a portfolio of many investments, and he proposed a modification known as the diagonal model. Sharpe suggested that the covariance between the returns on any pair of securities is due only to the dependence of each return on the same "market index." He further postulated that the return of each security depended linearly on this market index. By removing this common source of variation, the portfolio analyst is left with residual variations in the two returns which are independent of each other. Extending this idea to a portfolio of n securities results in an expression for portfolio risk which has (n+1) components (i.e., the individual residual variances of the n securities, and a term involving the market index variance). Undoubtedly, the Sharpe model provides a significant improvement, although the practical results given by either model leave a great deal to be desired, and are, in fact, sufficiently poor for the investment analyst to be forgiven for relying on his intuition. The criticisms leveled at the theory are, in general, based upon empirical evidence, and—valuable as this evidence might be—are not based upon criticism of the basic theory itself. In particular, the present writer can find in the literature no examination of the theory from a statistical viewpoint. The purpose of this article is to illustrate why, statistically, we might expect Markowitz's theory to provide results of dubious... [ABSTRACT FROM AUTHOR]
- Published
- 1974
- Full Text
- View/download PDF
36. DIRECT INVESTMENT, RESEARCH INTENSITY, AND PROFITABILITY.
- Author
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Severn, Alan K. and Laurence, Martin M.
- Subjects
CAPITAL movements ,FOREIGN investments ,INVESTMENTS ,RATE of return ,PROFITABILITY - Abstract
The article discusses direct investment, research intensity, and profitability in U.S. firms. Foreign direct investment shows U.S. firms have experienced high internal rates of return on investments abroad. Research demonstrates that direct investors are found mostly in research intensive industries and, therefore, their profitability is tied to research and development. Investing abroad increases the expected returns on research and this causes the internal rate of return on foreign direct investment to overrun average rates of return.
- Published
- 1974
- Full Text
- View/download PDF
37. THE BIAS IN COMPOSITE PERFORMANCE MEASURES.
- Author
-
Klemkosky, Robert C.
- Subjects
MUTUAL funds ,INVESTMENTS ,STOCK funds ,RATE of return ,CAPITAL assets pricing model ,CAPITAL - Abstract
Within the past decade, considerable progress has been made in measuring ex post portfolio performance. The two parameter risk-return dimension of investment performance as pioneered by Markowitz has been reduced to a single parameter which incorporates measures of both risk and return. Several different but related one-parameter measures of performance have been developed, notably by Sharpe [8], Treynor [11], and Jensen [3], and are commonly referred to as composite performance measures. Theoretically, the composite measures allow portfolios with different risks and returns to be compared directly. In recent years risk-adjusted measures of performance have been receiving considerable attention outside of the academic journals. The wellpublicized Bank Administration Institute (BAI) study of 1968 [1] concluded that a complete evaluation of a pension fund manager's investment performance must include an assessment of the degree of risk taken to achieve the returns realized. In addition, the Securities and Exchange Commission [6], in its Institutional Investor Study of 1971, has stated that performance measures should be adjusted for volatility and incentive fees should be based only on volatility-adjusted returns. Furthermore, the large negative returns earned by many funds during the 1969-70 bear market have made investors aware of the degree of risk associated with large positive returns. Just as the risk-adjusted performance measures were starting to receive publicity outside of academic circles, Friend and Blume [2] came up with empirical evidence that made the composite performance measures suspect. Selecting 200 random portfolios from the common stocks listed on the NYSE from January 1960 through June 1968, they found an inverse relationship between the composite performance measures and the risk measures. Their results suggested a bias against high-risk portfolios and suggested that the best way to achieve good risk-adjusted performance was to select a... [ABSTRACT FROM AUTHOR]
- Published
- 1973
- Full Text
- View/download PDF
38. EVIDENCE OF THE INFORMATION CONTENT OF ACCOUNTING NUMBERS: ACCOUNTING-BASED AND MARKET-BASED ESTIMATES OF SYSTEMIC RISK.
- Author
-
Gonedes, Nicholas J.
- Subjects
ACCOUNTING ,MARKET prices ,PRICES of securities ,RATE of return ,INCOME ,STOCK price indexes - Abstract
The article attempts to provide empirical evidence on the information content of accounting numbers. The author states that estimates of systematic variability conditional upon market price data were gathered via the market model. He explains that analogous linear models were applied to accounting income numbers. He states that the documented income number series associated with a firm's operations can be treated in a manner that is similar to the manner in which the market model treats market-determined rates of return.
- Published
- 1973
- Full Text
- View/download PDF
39. NATURAL BEHAVIOR TOWARD RISK AND THE QUESTION OF VALUE DETERMINATION.
- Author
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Huntsman, Blaine
- Subjects
ASSETS (Accounting) ,VALUATION ,MATHEMATICAL models ,COST analysis ,RATE of return ,DEBT-to-equity ratio - Abstract
This study deals with behavioral assumptions that necessarily underlie the theory of asset valuation. Recognized logical and empirical implausibilities associated with the particular set of assumptions that provides the underpinnings of much currently espoused asset theory are reviewed. A valuation model based on a more realistic set of behavioral assumptions is then proposed and tested empirically. [ABSTRACT FROM AUTHOR]
- Published
- 1973
- Full Text
- View/download PDF
40. THE PREDICTION OF SYSTEMATIC AND SPECIFIC RISK IN COMMON STOCKS.
- Author
-
Rosenberg, Barr and Mckibbent, Walt
- Subjects
RISK ,STOCKS (Finance) ,FORECASTING ,RATE of return ,DISTRIBUTION (Probability theory) ,CORPORATE finance - Abstract
Ex ante predictions of the riskiness of returns on common stocks — or, in more general terms, predictions of the probability distribution of returns — can be based on fundamental (accounting) data for the firm and also on the previous history of stock prices. In this article, we attempt to combine both sources of information to provide efficient predictions of the probability distribution of returns. We predict two parameters of the distribution of returns for each security in each year: the response to the overall market return (β), and the variance of the part of risk, specific to the security, that is uncorrelated with the market return. A cross section of time series data on returns and accounting variables, taken primarily from the Compustat tape, is used. Several recent developments in statistical methodology are applied. [ABSTRACT FROM AUTHOR]
- Published
- 1973
- Full Text
- View/download PDF
41. A SUFFICIENT CONDITION FOR A UNIQUE NONNEGATIVE INTERNAL RATE OF RETURN.
- Author
-
Norstrøm, Carl J.
- Subjects
INTERNAL rate of return ,RATE of return ,HIGH yield investments ,CASH flow ,REVENUE management ,EXPECTED returns - Abstract
This article presents information on a sufficient condition for a unique nonnegative internal rate of return. The author shows that a class of investment and financing projects exists that have a nonnegative internal rate of return that is unique. Additionally, the author shows that this nonuniqueness exists to a greater degree than once believed. The author discusses how computer programs could incorporate a feature to check for uniqueness of the internal rate of return which would add a great deal of efficiency to the process.
- Published
- 1972
- Full Text
- View/download PDF
42. AN ANALYSIS OF PORTFOLIO ACCUMULATION STRATEGIES EMPLOYING LOW-PRICED COMMON STOCKS.
- Author
-
Pinches, George E. and Simon, Gary M.
- Subjects
INVESTMENT analysis ,PORTFOLIO management (Investments) ,FINANCIAL management ,RATE of return ,SECURITIES trading ,INVESTMENTS - Abstract
This article presents an analysis of portfolio accumulation strategies that involve low-priced common stocks. The authors examine and evaluate the performance of two alternative portfolio strategies; the buy-and-hold strategy and the fixed proportion or reallocation strategy. They evaluate these two strategies by using low-priced common stocks. They believe this research will add to the growing body of research that in concerned with measuring the effectiveness of various portfolio management strategies. Their findings indicated that the fixed proportion strategy generally performed at a higher rate.
- Published
- 1972
- Full Text
- View/download PDF
43. THE DEMAND FOR CREDIT UNION SHARES: A CROSS-SECTIONAL ANALYSIS.
- Author
-
Taylor, Ryland A.
- Subjects
CREDIT unions ,ECONOMIC demand ,RATE of return ,ASSETS (Accounting) ,SAVINGS & loan associations ,STOCKS (Finance) - Abstract
This present study has uncovered additional nonprice items that are relevant to the household demand for credit union shares. Factors such as convenience and image, while extremely hard to measure and capture statistically, prove to be important in the selection of an institution for the purpose of saving. In the case of the credit union, the members' image of that institution as a lender seems to strongly influence their choice among savings institutions. This characteristic has far-reaching implications for the management of credit unions, banks, and savings-and-loan associations. In the case of banks, the customers' experience with them in other markets helps form an image of the institution that may have a significant impact on their demand for time deposits. Casual observation seems to indicate that bankers realize this connection, at least with respect to their larger depositors. For savings-and-loan associations this connection may not be all that important since the customers' frequency of contact in other markets is not as great. Their ability to attract and hold savings may hinge mostly on the payment of high rates of return. As is the case with most statistical studies, this one concludes with the standard expression of the need for further investigation. The area that seems the most fruitful is a further disaggregated approach perhaps at the level of the individual saver. These data are expensive to acquire and extremely hard to coax from individuals. It may be contended that the type of savings analyzed here is of the small variety, and perhaps additional knowledge of it is not useful. Certainly the larger depositors will be more responsive to rates of return, but the smaller and more numerous depositors will continue to be strongly influenced by nonprice items. [ABSTRACT FROM AUTHOR]
- Published
- 1972
- Full Text
- View/download PDF
44. DETERMINANTS OF MUNICIPAL BOND YIELDS.
- Author
-
Hastie, K. Larry
- Subjects
MUNICIPAL bonds ,BOND ratings ,RATE of return ,BOND market ,REGRESSION analysis - Abstract
This article presents information on the determinants of municipal bond yields. The author examines the determinants of the structure of municipal bond yields and provides empirical evidence from tests that were conducted to measure the impact of these factors on the yields. The author is interested in understanding why the yields from one state may be different from another state's bond yields. The findings indicate that bond yields are a result of the bond's default risk and marketability. The author discusses the situations where each of these factors plays the more significant role.
- Published
- 1972
- Full Text
- View/download PDF
45. STATISTICAL BIASES AND SECURITY RATES OF RETURN.
- Author
-
Cheng, Pao L. and Deets, M. King
- Subjects
RESEARCH bias ,SECURITIES ,RATE of return ,CAPITAL investments ,MATHEMATICAL models of investments - Abstract
The article presents an exploration into the formation of annualization and overlapping biases in security rate of return statistical models through the underlying bias within the expected geometric mean return concerning the estimation of the population mean. Additional relationships between the geometric mean and the internal rate of return are also outlined.
- Published
- 1971
- Full Text
- View/download PDF
46. UTILITY IMPLICATIONS OF PORTFOLIO SELECTION AND PERFORMANCE APPRAISAL MODELS.
- Author
-
Wippern, Ronald F.
- Subjects
UTILITY functions ,MATHEMATICAL models of investments ,PORTFOLIO performance ,RATE of return ,MAXIMA & minima ,CAPITAL assets pricing model - Abstract
The article presents an exploration into the limitations and maximum points of the quadratic utility function used within capital asset pricing theories. Various levels of acknowledgment towards the existence of the model's shortcomings are described, highlighting the question of whether or not its maximum range is within or beyond relevant portfolio returns. Calculations are then offered specifically outlining the parameters of the equation maxima and their implications on using capital pricing models.
- Published
- 1971
- Full Text
- View/download PDF
47. THE MEASUREMENT OF SYSTEMATIC RISK FOR SECURITIES AND PORTFOLIOS: SOME EMPIRICAL RESULTS.
- Author
-
Jacob, Nancy L.
- Subjects
CAPITAL market ,FINANCIAL markets ,RATE of return ,RISK assessment ,INVESTMENT analysis ,MATHEMATICAL models of investments - Abstract
The article presents the results of an empirical study outlining the relationships between the volatility and market similarity models of measuring systematic securities risk and average returns, while also considering the implications of such behaviors on capital market theory. Conceptual reviews of the efficient capital market theory as modeled by Sharpe-Lintner-Mossin and the State-Preference theory of Arrow-Debreu-Hirshleifer are provided. Results of the study are discussed primarily concerning the consistency and stability of systematic risk measures to single-period average returns.
- Published
- 1971
- Full Text
- View/download PDF
48. EXPECTED GROWTH, REQUIRED RETURN, AND THE VARIABILITY OF STOCK PRICES.
- Author
-
Haugen, Robert A.
- Subjects
RATE of return ,STOCK prices ,GROWTH rate ,FINANCIAL performance ,TAXATION of investments ,INVESTORS - Abstract
The article focuses on stock price variability and its effect on required returns and expected dividend growth. It states that with a smaller spread between anticipated dividend growth rates and the rate of return required by investors, common stock prices should become more variable. It suggests that capital gains tax has a stabilizing influence on stock prices and is a tax on growth, which works to inhibit narrowing of the spread between rate of return and growth rates. It states that price appreciation may be a significant part of expected returns over the planning period with return variance being one determinant of covariance with other returns, an important variable in portfolio analysis.
- Published
- 1970
- Full Text
- View/download PDF
49. RISK-RETURN MEASUREMENT IN PORTFOLIO SELECTION AND PERFORMANCE APPRAISAL MODELS: PROGRESS REPORT.
- Author
-
Bower, Richard S. and Wippern, Ronald F.
- Subjects
RATE of return ,RISK assessment ,RETURN on assets ,PORTFOLIO management (Investments) ,FINANCIAL leverage ,ASSET-liability management - Abstract
This article focuses on risk assessment and the measurement of the rate of return in portfolio selection and performance appraisal models. The authors contend that the fund with the highest ratio is the best fund because, by levering it correctly or by offsetting it with riskless investments, this fund can be conformed to align itself to any other fund in one dimension, either risk or return, while it does better in the other dimension. Topics include the difference between the measures of the ranking of funds, the variety of logical problems associated with the use of the suggested risk-return indexes as measures of portfolio performance and structure,and the criteria for optimal portfolios.
- Published
- 1969
- Full Text
- View/download PDF
50. AN EMPIRICAL STUDY OF THE RISK-RETURN HYPOTHESIS USING COMMON STOCK PORTFOLIOS OF LIFE INSURANCE COMPANIES.
- Author
-
Gentry, James and Pike, John
- Subjects
RATE of return ,EXPECTED returns ,LIFE insurance companies ,STOCKS (Finance) ,RISK - Abstract
Although the data are not directly comparable to Sharpe's, this evidence generally supports his hypothesis of a positive linear relationship between risk and return for common stock portfolios. The regression results reported here are not as high as in Sharpe's study, but they are statistically significant. The data are quite closely clustered, and the linear fit obtained implies a 2.6 percent. pure rate of interest. [ABSTRACT FROM AUTHOR]
- Published
- 1970
- Full Text
- View/download PDF
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