In his recent paper in this Journal, Miller [3] proposed, following Adler's results [1], that “the investor exhibits decreasing absolute risk aversion with respect to expected wealth if, as increased holding σ constant, the slope of the indifference loci decreases” [3, p. 301]. He further attempted to have shown that in general the sign of () is the same as the sign of r'(W) (the derivative of the absolute risk aversion measure), but this is not proved.

[We propose that fund performance can be predicted by its R 2 , obtained from a regression of its returns on a multifactor benchmark model. Lower R 2 indicates greater selectivity, and it significantly predicts better performance. Stock funds sorted into lowest-quintile lagged R 2 and highest-quintile lagged alpha produce significant annual alpha of 3.8%. Across funds, R 2 is positively associated with fund size and negatively associated with its expenses and manager's tenure.]

We propose that fund performance can be predicted by its R2, obtained from a regression of its returns on a multifactor benchmark model. Lower R2 indicates greater selectivity, and it significantly predicts better performance. Stock funds sorted into lowest-quintile lagged R2 and highest-quintile lagged alpha produce significant annual alpha of 3.8%. Across funds, R2 is positively associated with fund size and negatively associated with its expenses and manager's tenure.

This paper studies the association between the market's expectations of Saddam Hussein's fall from power, as reflected in “Saddam contract” prices, and stock prices, oil prices and exchange rates. During the war, a rise in the probability of Saddam's fall, which also indicated a speedy end to the war, was positively and significantly associated with stock prices, strengthened the dollar against the Euro, and lowered oil prices. Before the war, a rise in the probability of Saddam's fall, which may also have indicated the probability of a costly war breaking out, lowered stock prices, which adjusted gradually to this information.

The higher taxation of dividends in the United States gave rise to theories that explain why companies pay dividends. Tax-based signaling models propose that the higher tax on dividends is a necessary condition to make them informative about companies' values. In Germany, where dividends are not tax-disadvantaged and in fact are taxed lower for most investor classes, these models predict that dividends are not informative. However, the authors find that the stock price reaction to dividend news in Germany is similar to that found in the United States. This suggests other reasons, beyond taxation, that make dividends informative.

The effects of asset liquidity on expected returns for assets with infinite maturities (stocks) are examined for bonds (Treasury notes and bills with matched maturities of less than six months). The yield to maturity is higher on notes, which have lower liquidity. The yield differential between notes and bills is a decreasing and convex function of the time to maturity. The results provide a robust confirmation of the liquidity effect in asset pricing.

The authors study the joint effect of the trading mechanism and the time at which transactions take place on the behavior of stock returns using data from Japan. The Tokyo Stock Exchange employs a periodic clearing procedure twice a day, at the opening of both the morning and the afternoon sessions. This enables them to discern the effect of the clearing mechanism from the effect of the overnight trading halt. While the periodic clearing at the beginning of the trading day is noisy and inefficient, the midday clearing transaction appears to be no worse than the two closing transactions.