CAPITAL MARKET IMPERFECTIONS AND THE COMPOSITION OF OPTIMAL PORTFOLIOS.

The article focuses on the application of mean-variance and selection criterion to the empirical problem of generating efficient mixed portfolios of common stocks and bonds. Portfolio theory provides a positive explanation for liquidity preference and the inverse relationship between the demand for money and rate of interest. The findings of the research indicate that some imperfections in the capital market have persisted over a significant period of time. It is noted that stochastic dominance analysis lends additional support to the conclusions reached using the mean-variance portfolio model.