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The most important factor that has been affecting both the size and nature of the potential market for tax-exempt bonds is the rising ratio of "take home" interest on these bonds, compared to that on taxable bonds. The reasons behind this sharp rise in the ratio in recent years are examined and measures that must be taken in order to take advantage of this changing market are investigated. The investor's choice between purchasing taxable and non-taxable bonds is explored, and the implications of ensuing market changes are considered.

The article reports on the preferences of stockholders. The author focuses on discussing the impact of dividend payout policy on the price of stocks by comparing the price-earnings ratios of low-payout and high-payout stocks. Results from a related research study indicate that stockholders often prefer conservative stocks and limited cash dividends. After analyzing the research results, the author concludes that stockholders prefer to reinvest in corporations in order to support organizational growth which, in turn, will heighten stock prices.

The article discusses the public disclosure of accounting information. A book called "The Allocation Problem in Financial Accounting Theory," by Arthur L. Thomas provides the backbone of the author's criticism on financial data reporting. Thomas promotes the idea of using market value oriented reports as a solution to allocation problems. A book by Lloyd R. Amey, which is called "The Efficiency of Business Enterprise," focuses on business efficiency and also discusses the matter of providing accounting information to investors.

This article critiques an argument made by Haim Ben-Shahar, who presented a theory of the firm's capital structure from the standpoint of the return-risk framework of investor behavior. The author wishes to build upon his work by extending it to instances where investors hold diversified portfolios of common stock, as well as challenging some the Ben-Shahar's assumptions. One instance of this is his belief that investors have similar beliefs about risk and return. The author feels this is less accurate than the M&M arbitrage construct.

This article presents a reply by the author to critiques by Robert L. Litzenberger and Charles P. Jones, and Robert A. Haugen and James L. Pappas to his work on capital structure theorem. He wishes to incorporate investor diversification among multiple assets into his theorem but he states that removing diversification contraints will not change his cost of capital theorem. Even when equilibrium in the securities market is reached, the author asserts the theorem holds up because if a firm increases its financial leverage the investor can buy both stock and bonds.

This paper has added to the small body of data on rates of return on equity investment in real estate by combining data on insurance company loans over $100,000 with assumed values of parameters for the equity investor. The returns which result are computed before and after financing and before and after tax. The purpose of this paper was to present the equity returns rather than to editorialize on the adequacy of the rates. In this regard the paper concludes with the reminder that the rates of return are hypothetical since they are based on assumptions and not on historical analysis of realized returns by actual investors. With this in mind, it is hoped that the return relationships will be of use in investment research and planning. [ABSTRACT FROM AUTHOR]

This article presents a comment on a paper that examined the economic variables which explain the required return on stock for the investor. The author's primary concern with the paper deals with the theoretical basis on which the empirical research was conducted. The author addresses the utility function that is presented and discusses two errors that he believes exist in this equation. The first error is related to the function being restricted due the inclusion of only three moments of probability distribution. The second error deals with inconsistencies in the analysis based on the application of a limited utility function.

This paper is based on the thesis that by studying financial theory and financial practice in relation to one another, we may find ways in which both can be improved. The paper will first present a theory of investment decision under uncertainty which incorporates the following ideas: (1) a firm should choose portfolios rather than projects, (2) investment and financing decisions must be made simultaneously if the optimal program is to be chosen, (3) the risk attributable to an investment should be measured by its contribution to the total risk of a firm viewed in a market context, (4) a firm should trade off risk and return at the market-established rate of substitution, and (5) investors view security returns in real terms rather than in monetary terms. The paper will then present the results of three case studies investigating the actual making of investment decisions. We shall examine the disparity between the theory and practice of investment decisions, and suggest some reasons why the sophisticated techniques developed by theorists are not fully implemented in practice. Finally, the paper will indicate some of the lines along which future research should be directed. [ABSTRACT FROM AUTHOR]

In this paper we present the capital structure theorem within the framework of the theory of investors' behavior towards return and risk. Such an approach constitutes a first step towards integrating the theory of the firm's finance with the theory of investors' behavior. It may also help to clarify the controversy over the capital structure theorem. [ABSTRACT FROM AUTHOR]

The article focuses on risk variables and their relationship to the required return on equity. It states that certain types of investor risks are enabled by the principle of expected utility maximization. It suggests that statistical results of the probability distribution are reasonable risk measures while the market correlation coefficient of returns does not reasonably measure risk, and that regressions involving the dividend-earnings ration show that it is significantly and negatively related to the required returns.

The article discusses a model of capital assets pricing that can be used to predict market behavior with risk as a factor in the analysis. A graph is shown that depicts how the risk that investors are willing to take can impact the expected return. When managing a portfolio, investors are likely to choose investments on the basis of the expected value that will increase their personal wealth and the standard deviation. The article concludes that investors will settle for a modest rate of return on defensive securities than they would expect from more aggressive kinds of investments.

This article discusses realized yields on corporate securities and how these compare with a measure for expected yield that is often used by researchers. Little research has been done on ex post yields, which may be due to the difficulty of calculating this information. The yields of bonds, preferred, and common stock were studied to test the measurement method. Several tables are included in the article that show the realized yields of common stock that were sold between 1929 and 1962, the realized yield of preferred stocks for the same period, and the realized yield of bonds from 1929-1962.

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.

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.

This article discusses various techniques for selecting portfolios of securities. Investment managers must consider both the characteristics of the individual securities and the relationships between those securities. Until economist Harry Markowitz, those theoretical models failed to explain the meaning of diversification. Markowitz's theory states that investors like return and dislike risk. Thus, the investor would probably seek out a portfolio, which provides the maximum return for a given level of risk or the minimum risk for a given level of return. The Markowitz model also considers time analysis, the portfolio is purchased and remains unchanged until the next run. This introduces problems in the choice of a time period for consideration.

The article discusses the report by A. A. Robichek and S. C. Myers, "Optimal Financing Decisions," which makes the point that financial decisions made by a firm under uncertainty can be very unsatisfactory, and which offers some innovations that can reduce risk. These include giving the investor more than one utility function, and offering information to the investor about returns over time that may reduce the risk of investing. The author points out the difference between investment rules governing management and the market.

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.

An algebraic relationship is developed linking the expected long-term yield to an investor with the company's expected internal rate of return on its equity assets. Assuming that the market normally ranks shares by expected yield, allowing where necessary for a risk premium, it is shown that the cost of equity capital must be the company's expected internal rate of return. [ABSTRACT FROM AUTHOR]

This article points out the need for an empirical study of the relationship of long-run expected rates of return to risk despite the existence of numerous studies of short-term expected rates. Under certain conditions, the empirical findings about the short run can be generalized to the long run. Under the assumptions of independence and no transaction costs, it would be possible to infer the relationship between expected long-run returns and risk from the short-run relationship with the same probability that the short-run relationship is held. Yet these assumptions do not describe the market place exactly, so that there is no guarantee that any inference about long-run relationships from short-run empirical results would be valid. The independence assumption, while theoretically appealing, appears valid only as an approximation. A number of earlier studies have found some dependence among successive rates of return, although generally not of sufficient size to use for profit after taking account of transaction costs.

In the article, the author comments on the study "The Investor Capitalization Theory of the Cost of Equity Capital" by Walter Mortan, published in the August 1970 issue of the journal "Land Economics." The author in the article contends that the discounted cash flow techniques presented in the article is not theoretically inconsistent as Morton charges and it has regulatory value. According to the author, Morton defines the capitalization theory of economic value as the method of equating future income to present value by a discount rate. The author shows that establishing an appropriate revenue requirement, commensurate with current regulatory procedure, involves ascertaining the embedded costs of debt and preferred stock. The authors also find little pragmatic relief in Morton's alternative technique for estimating an appropriate rate of return by evaluating alternative investment opportunities of similar risk. In the author's opinion, forcing a choice between two potentially useful approaches to rate of return at this point reflects methodological chauvinism for one unmeasurable point of view over another unmeasurable point of view.

The analysis of security and commodity markets in industrial countries has long been a subject of interest to men who hoped to develop predictive formulae applicable to the prices in such markets. Until fairly recently, the study of such prices was primarily the domain of the speculator rather than the academician. Speculators have always sought profits in excess of the average obtained in the market, inherently believing that they could profit in the market from specialized knowledge. While there is not widespread agreement on the stochastic nature of security and commodity prices, a generalized theory of such behavior has arisen. Known as the random walk theory of security prices, it is dependent upon the assumption that the current market price of a security will reflect all information available to the participants in the market at any point in time. Academic research concerning the random walk hypothesis has been largely empirical, and can be generally divided into two major categories. The first and largest body of research has involved statistical tests of prices over time. A second body of empirical research has been concerned with testing a variety of mechanical trading rules, such as those that might be employed by a market technician.

This paper investigates the properties of a market for risky assets on the basis of a simple model of general equilibrium of exchange, where individual investors seek to maximize preference functions over expected yield and variance of yield on their portfolios. A theory of market risk premiums is outlined, and it is shown that general equilibrium implies the existence of a so-called "market line," relating per dollar expected yield and standard deviation of yield. The concept of price of risk is discussed in terms of the slope of this line. [ABSTRACT FROM AUTHOR]

The traditional theory, in which investors are assumed to forecast rates "to Kingdom come", implicitly requires that they be precluded from disposing of securities prior to maturity. A theory of the term structure of rates in which investors are not so constrained, but which retains assumptions 1-3, must involve only one- period forecasts. This is shown in Part II after an examination in Part I of the underpinnings of the traditional theory. Some concluding comments are contained in Part III. Discussions of the expectations theory of the term structure of interest rates have tended to be rather mechanical, ignoring the microeconomic foundations of market equilibrium solutions. It will be useful, therefore, to review the process by which, according to the traditional formulation of the expectations theory, the bond market reaches equilibrium. If one wishes to test the results obtained in this study and to compare the implications of our decision rules with observed data, one must first supplement these rules with hypotheses concerning the formulation of expectations. The model developed in this paper can readily be applied to the choice among bonds of any or all maturities under uncertainty.

In a world of certainty, efficient allocation of capital would be evidenced by equality of the yield for all forms of investment, waiving certain complications in comparing differing time-shapes of yield streams. And, since in such a world expectations would always be borne out, the equality of yields would be true both prospectively and retrospectively. One must note first, however, that in a world of uncertainty, the equilibrating market forces can only work on the prospective returns to investment. There are two possible sources of difficulty here. First, prospects or anticipations are not ordinarily observable and, second, in a world of uncertainty the returns anticipated are multivalued . The article develops and compares alternative formulations of the investor's attitude toward multivalued returns, the question of how anticipations about such returns may be made operational for the purpose of direct empirical testing will not be considered here. The article concludes that the formulation of investment choice under uncertainty in terms of time-state preferences, with the assumption of risk-aversion does seem to promise progress toward harmonizing the bewildering diversity of market yields.

This article attempts to show what the proposal to charge the normal investment return as a manufacturing cost means in the case of an enterprise in which there is borrowing neither of money nor of goods. The case of a manufacturing company (A) is studied. All the fixed assets employed in the business, valued at $20,000, are owned, not rented, and the company's accountant follows the practice of charging depreciation thereon at the rate of $1,000 per annum. Let it be further assumed that company A manufactures only one product, which is here designated as and that in the year in question 1,000 units of X were produced and sold. Also assume that Company B was organized with a capital stock of $80,000 sold at par. Bonds were issued having a par value of $10,000, paying interest at the rate of 5 per cent per annum. By virtue of the conditions laid down, the manufacturing costs of company B are identical with those of company A; and the books and statements should show that fact. The mere payment of bond charges has in no way affected the costs of manufacture. Also consider another Company C, in which there are no bondholders. If in these three establishments technical and commercial (not financial) conditions should become altered, the alterations affecting the three companies in different directions and degrees, the cost accounts, kept as indicated, would make possible an accurate comparison of the commonly accepted costs. scribed has been so recorded. Yet it is possible to find eminent authority for the inclusion among the "indirect expenses" of manufacture of both contractual interest and contractual rent.

In this paper, we discuss the effects of changes in investable wealth on investment behavior when portfolio choices are subject to a chance constraint. Alternative specifications of the chance constraint are shown to imply increasing, decreasing, or constant relative risk aversion with respect to changes in wealth. [ABSTRACT FROM AUTHOR]

Using a model similar to Sharpe's, the author discusses the shape of the efficient frontier of security portfolios and the determination of an optimal investment policy. Sharpe shows that in equilibrium, the expected returns and standard deviations of all efficient security portfolios lie along a straight line. In this article, the author demonstrates that this conclusion depends on the assumptions that there exist both a risk-free asset and a single interest rate at which all investors can borrow or lend funds. If either assumption is removed, the expected returns and standard deviations of efficient portfolios will not be linearly related. The author suggests that in equilibrium, the efficient frontier is not unique for all investors, but that the efficient frontier will be different for investors with different borrowing rates. Furthermore, if no riskless asset exists, a portfolio may exist which has both higher expected real return and lower risk than does a default-free security. [ABSTRACT FROM AUTHOR]

This paper is concerned with adapting Dr. Harry M. Markowitz's work on optimum portfolio selection of equity issues to portfolio selection of debt issues for achieving optimum maturity distribution. In establishing the optimum, investor's "tactics" take place of individual securities in Markowitz's analysis. An investor can choose from sets of efficient tactics either to minimize the variance of portfolio return or to maximize expected portfolio return. The model requires similar computational methods advanced by Markowitz himself and by others. It presents an exploration of techniques needed to optimize bond portfolio of financial firms in a way which will allow funds to be re-invested at minimum opportunity loss. [ABSTRACT FROM AUTHOR]

This article discusses the study which investigated whether speculation in forward exchange is profitable or not. This study develops one method and applies it to empirical data. A method of making indirect inferences about the elasticity of supply of forward exchange is used. The approach involves the measurement of a rate of return which a speculator could have earned if he had followed certain simple rules of behavior during a period of approximately six years from July 1955 to April 1961. According to the theoretical framework presented the high rates may simply reflect a risk premium. The biggest risk facing the speculator is that of devaluation.

This article examines the effect of income tax on the investment of available funds, particularly on investment in risky ventures, under three assumptions. An investment involves the possibility of a loss. It will not be undertaken unless the expected return appears sufficiently promising. In every investment decision the investor must weigh the advantage of a greater return, or yield, against the disadvantage of a possible loss, or risk. These two variables serve as tools for the analysis of the problem. The effects of taxation upon risk-taking are analyzed in two steps: first, one considers how the imposition of a tax, under varying conditions, affects the yield and the risk of an investment; second, one inquire how the investor will react to these changes. That the tax reduces the yield is entirely evident and has been much emphasized; but the equally important fact that the tax may also reduce the degree of risk has received little attention. Scholar A.P. Lerner has recently pointed out its significance. By imposing an income tax on the investor, the Treasury appoints itself as his partner, who will always share in his gains, but whose share in his losses will depend upon the investor's ability to offset losses against other income.

This article presents a response of the author on comments made by scholar R.S. Meriam on a paper related to the fair return on fair value doctrine which was published in the February 1930 issue of "The Quarterly Journal of Economics." According to the author,concerning the proportions between fixed and working capital in the regulated field, he believed that he had not come close to begging the question, if this means offering dose to negligible support for a conclusion. His apparent belief suggests that the regulated return doctrine pays no attention to efficiency of management or prudence of investment seems to arise out of careless reading. He further states that if his distinction at several points between economic and technological guides is not sufficient to dispose of the suggestion, he may point out that the fair return doctrine ceases to carry out its central idea in so far as it relies upon the effect of varying proportions upon the rate of return as a guide to establishing and maintaining proper proportions between fixed and working capital. In practice, any particular investor must reason, if at all, that his particular investment would not affect the value-product of resources in the employment to which it is destined.

The standard options in the whole life insurance contract have values which are inadequately recognized in the controversy over the relative merits of whole life and term insurance plus direct investment. Capital budgeting techniques are here applied to that problem. The extended term option in the whole life contract is recognized and given an economic value. Consequently, the equilibrium rate of return that must be earned on any direct investments by an insured is found to be greater than in earlier studies. The pretax equivalent of this rate is also higher than the rates normally available to individual investors in instruments offering a high degree of safety of principal. [ABSTRACT FROM AUTHOR]