In a recent article Fabozzi and Francis [3] presented the results of empirical tests designed to determine if the regression coefficients of the single-index market model were significantly different in bull and bear markets. Using three alternative definitions of bull and bear markets, Fabozzi and Francis (FF) concluded the coefficients of the single-index market model were not significantly different in the two types of markets.

The mathematical difficulties encountered when attempting to express the internal rate of return (IRR) of a combination of two or more investments as a weighted algebraic sum of the individual investments' IRRs has been recognized in the financial literature for some time. However, in a recent issue of this journal, Professors Reilly and Wecker (hereafter R-W) [3] apply the well-known mathematical impossibility of expressing the root(s) of a polynomial as an algebraic combination of the roots of related polynomials to question the validity of the weighted cost of capital (kw) concept.

Abstract ABSTRACT: The purpose of this study is to determine whether funds and cash flows possess incremental information beyond accrual earnings in the context of explaining market risk. The results indicate that funds and cash flow risk measures (betas) provide significant incremental explanatory power over that provided by the earnings risk measure (β) in explaining the variability in market betas. Additionally, the results reveal that an earnings β does not possess additional explanatory power beyond that provided by either funds or cash flow betas. The major implication of the results is that with respect to the explanation of market risk, the information in accrual earnings appears to be a subset of the broader set of information contained in cash flows.

[The purpose of this study is to determine whether funds and cash flows possess incremental information beyond accrual earnings in the context of explaining market risk. The results indicate that funds and cash flow risk measures (betas) provide significant incremental explanatory power over that provided by the earnings risk measure (beta) in explaining the variability in market betas. Additionally, the results reveal that an earnings beta does not possess additional explanatory power beyond that provided by either funds or cash flow betas. The major implication of the results is that with respect to the explanation of market risk, the information in accrual earnings appears to be a subset of the broader set of information contained in cash flows.]