The problem of the portfolio demand for money was first rigorously studied by Tobin [22]. It has been analyzed since then, by Hicks [8] and Arrow [1], among many others. Many interesting results and implications regarding liquidity preference and risk-taking are derived in these studies. However, the effect of purchasing power risk on liquidity preference has been overlooked in these studies.

We have formulated the mean-variance models of portfolio selection with stochastic cash demand. The results of the general model have indicated that the characteristic of the investor's stochastic cash demand, the liquidity risks of assets (measured by the covariance between an asset's return and the cash demand), and the structure of transfer costs also play important roles in the determination of the investor's optimal portfolio. We have also shown that the model of portfolio selection with stochastic cash demand can be greatly simplified if the assumption of symmetric transfer costs is invoked. Furthermore, it has been shown that the simplified model can be reformulated and solved by the LP techniques. Thus, LP formulation of portfolio selection with stochastic cash demand should have practical usefulness.Finally, along the line of works by Chen, Jen and Zionts [3, 4], Pogue [14, 15] and Stone and Reback [20], one can extend the analysis in this paper to the problem of dynamic portfolio management with stochastic cash demand and transfer costs.

Andrew H. Chen, External Financing and Liquidity: Discussion, The Journal of Finance, Vol. 39, No. 3, Papers and Proceedings, Forty-Second Annual Meeting, American Finance Association, San Francisco, CA, December 28-30, 1983 (Jul., 1984), pp. 908-910

Abstract Falk and Heintz have proposed a scalogram technique to rank industries according to risk as reflected by financial ratios. The present paper examines some problems which need to be resolved before this technique can be used. First, the F & H selection of ratios is somewhat subjective and is not supported by tests for validity and reliability. And because of the confounding effects of changing economic conditions, the difficulty in obtaining a unique observable concept for industry risk, and because of measurement problems, it may be infeasible to assure an adequate degree of validity and reliability for this ranking technique. Also, some of the ratios selected by F & H may have high inter-correlation with other F ratios, thus implicitly adding greater weights to some of the ratios. Moreover, the F & H technique may be biased because of the selection of a different number of significant digits for two of the ratios. F & H have not offered any supporting reason for either of these sources of bias.