Knowledge that Transforms

This paper suggests that it is not possible to demonstrate, using the best available empirical methods, that the expected returns on high yield common stocks differ from the expected returns on low yield common stocks either before or after taxes. A taxable investor who concentrates his portfolio in low yield securities cannot tell from the data whether he is increasing or decreasing his expected after-tax return by so doing. A tax exempt investor who concentrates his portfolio in high yield securities cannot tell from the data whether he is increasing or decreasing his expected return. We argue that the best method for testing the effects of dividend policy on stock prices is to test the effects of dividend yield on stock returns. Thus the fact that we cannot tell, using the best available methods, what effects dividend yield has on stock returns implies that we cannot tell what effect, if any, a change in dividend policy will have on a corporation's stock price.

This paper considers the problem of the investor who has numerous opportunities for revising his portfolio and whose choices are governed by a utility function defined on ‘terminal’ wealth, U0(x0). Attention is focussed on the behavior of the induced utility functions of intermediate wealth with n periods to go, Un(xn), and the associated investment policies. Conditions under which the functions Un(xn) will tend to isoelasticity have previously been given by Mossin and by Leland. In this paper, the conditions for convergence are weakened further, to the point where they appear sufficiently broad to encompass perhaps most utility functions of practical interest.

In this article, the quantitative form of capital market equilibrium is derived for a multi-period economy in which (a) there are many consumption goods whose future prices are uncertain, and (b) the investment opportunities available to consumers include both common stocks and default-free bills of many different maturities. Particular emphasis is placed on consumer reaction to uncertainty about shifts in commodity prices and the term structure of interest rates and on the way one should expect to observe this reaction reflected in portfolio choices and equilibrium stock prices.

The purpose of this paper is to note that the question of optimal diversification cannot be answered simply by determining the average variability of equally allocated investment. Empirical results are presented which show that it is possible to obtain the same level of average variation with far greater average portfolio returns and fewer securities in the portfolio by using an alternative allocation scheme.