Knowledge that Transforms

Robert A. Olsen, The Effect of Interest-Rate Risk on Liquidity Premiums: An Empirical Investigation, The Journal of Financial and Quantitative Analysis, Vol. 9, No. 5, 1974 Proceedings (Nov., 1974), pp. 901-910

Peter S. Chung, An Investigation of the Firm Effects Influence in the Analysis of Earnings to Price Ratios of Industrial Common Stocks, The Journal of Financial and Quantitative Analysis, Vol. 9, No. 6 (Dec., 1974), pp. 1009-1029

Bryan Heatcotte, Vincent P. Apilado, The Predictive Content of some Leading Economic Indicators for Future Stock Prices, The Journal of Financial and Quantitative Analysis, Vol. 9, No. 2 (Mar., 1974), pp. 247-258

It is widely assumed in portfolio theory that investors are risk-averse expected-utility maximizers. There is a good theoretical reason for assuming expected-utility maximization. Such behavior is well known to be consistent with several quite plausible postulates of rationality [5]. On the other hand, the main empirical foundation for such behavior in portfolio selection appears to be the observation of diversification. Risk-averse, expected-utility maximization implies diversification in portfolio selection, and investors are observed to diversify.

The traditional valuation framework is unsuited to the task of valuing a growth stock when the capitalization rate is specified in terms of market leverage, simply because it is impossible to maintain a constant ratio of book to market leverage over the growth horizon. This severely limits the usefulness of the traditional model in analyzing the valuation problem. We have proposed a more general form of the model which allows us to show the consistency between M-M's Propositions I and II under growth.

The thoughts presented in this paper were developed during the first stage of an ongoing research project. This project is designed to shed light on the management of the size and exchange composition of financial assets and liabilities in the U.S. multinational companies (MNCs). The study also intends to analyze the impact of these policies on the international and national financial markets.

A convertible bond is a hybrid financial instrument that incorporates features of a bond (fixed income security) and an equity claim (usually common stock). In most instances the convertible can be exchanged, at the holder's option, for the common shares of the corporation issuing the convertible. The conversion value, or stock value, is the market value of the common shares for which the convertible can be exchanged. The bond value or floor price is the market value of an equivalent bond that does not include a conversion feature. The market price of a convertible will be the conversion value or the bond value, whichever is higher, plus a premium. The purpose of this paper is to develop and test a model which estimates the premium. The premium estimated is defined as the difference between the market price of the convertible and the bond value or conversion value, whichever is larger. No consideration will be given to convertible preferreds.

Single-period portfolio selection deals with the allocation of an investor's initial wealth to a finite number of risky assets according to his preferences over random final wealth. The purpose of this paper is to study chance-constrained portfolio selection from the point of view of utility theory.

This paper develops a credit-analysis model encompassing the accuracy of analytical methods, quality of applicants, cost of acquisition and analysis, profit from good loans, and losses from bad loans. Information generally available to the lending institution and subjective estimates can then be used to select from among alternative credit-granting systems the system with the greatest expected net present value. Each institution is thus able to find the credit granting system most appropriate for its particular market and analytical abilities.The model's profit maximizing objective and broad scope make it useful for setting credit department standards of performance. Costs can be compared with theoretical values of performance computed from loss rates, acceptance rates, and market information. The conditional probabilities, the chances of making the correct decision, can also be estimated for use in comparing methods of analysis or individual analysts. Unlike the loss rate, the conditional probability is an independent, unbiased measure of a method's accuracy.The example presented dealt with consumer installment loans, but the formulation is applicable to direct lending of any type. It provides the means for comparing loans with differing initial costs as well as widely varying risk classes and maturities. Financial institutions making direct loans add substantial values to capital supplied by the money and capital markets. The model is a theoretical formulation of the relationship between the cost and output of credit analysis.

Gary G. Schlarbaum, The Investment Performance of the Common Stock Portfolios of Property-Liability Insurance Companies, The Journal of Financial and Quantitative Analysis, Vol. 9, No. 1 (Jan., 1974), pp. 89-106