Professor Schwartz's [6] attempt to provide an economic model of trade credit is to be applauded. I am in complete accord with his statement [6, p. 656] that “the aggregate importance of trade credit and the economic effects generated by changes in trade credit flows suggest that greater attention should be given to this source of funds.” For too long, thorough qualitative and quantitative analyses applied to the phenomenon of trade credit have been somewhat neglected. In his attempt to remedy this situation, Schwartz is to be complimented.

Mark R. Eaker, Teaching International Finance--An Economist's Perspective, The Journal of Financial and Quantitative Analysis, Vol. 12, No. 4, Proceedings of the 1977 Western Finance Association Meeting (Nov., 1977), pp. 607-608

In [1, p. 999] I wrongly stated that “the solution locus generated by the chance-constrained problem is efficient (for the class of utility function implied by the expected wealth-probability of ruin criterion) if the assets follow a multinomial distribution with means above the survival level.” In support of this statement footnote 6 of [1] attempted to establish the quasiconcavity of the expected utility functionin the (μ, σ) plane, where F is the normal distribution, z = (s-μ)/σ

William R. Folks, Jr., Integrating International Finance into a Unified Business Program, The Journal of Financial and Quantitative Analysis, Vol. 12, No. 4, Proceedings of the 1977 Western Finance Association Meeting (Nov., 1977), pp. 599-600

Rowland R. Hill, An Algorithm for Counting the Number of Possible Portfolios Given Linear Restrictions on the Weights, The Journal of Financial and Quantitative Analysis, Vol. 11, No. 3 (Sep., 1976), pp. 479-480

1. This paper presents and tests a model of dealer inventory response. The estimated inventory responsiveness coefficient is statistically significant and its magnitude is consistent with reasonable values of underlying variables which, it is hypothesized, determine the coefficient.2. The sign of the inventory responsiveness coefficient indicates that dealers tend to be passive and acquire shares when prices fall and sell shares when prices rise. This type of behavior is sometimes termed “stabilizing.”3. Dealer inventories tend to increase on days prior to price declines and tend to decrease on days prior to price increases; that is, inventory changes tend to be “destabilizing” with respect to future price changes. This implies that a fraction of the public trades on superior information and that dealers tend to lose money to such information traders.4. There is a strong tendency for dealer inventory levels to return to normal, presumably zero. The implied typical inventory holding period is about 8 to 10 trading days.5. Comparison of NASDAQ dealers and NYSE specialists shows that the pattern of inventory responsiveness is very much the same for the two. This suggests that both act in accordance with the underlying economic model and that differential regulation has little effect on typical inventory responsiveness.6. This finding does not obviate the possibility that individual dealers or specialists behave in atypical or undersirable ways, and that the extent of such atypical behavior might depend on the degree of public regulation of dealer activities. An exhaustive comparative study of deviations from normal behavior was not possible. However, it was possible to compare the frequency of nonstabilizing transactions in which price change and inventory change on a given day are in the same, rather than opposite, direction. One could not conclude that NASDAQ dealers had more nonstabilizing activity than NYSE specialists.

In recent years the expected-utility approach to decision making under risk has gained increasing acceptance among portfolio theorists. On the other hand, the mean-variance (MV) approach of Markowitz [13], which has dominated portfolio theory in the past, continues to enjoy great popularity. In MV theory, the investor is assumed to rank his preferences for risky returns solely in terms of their means and variances, with higher means and lower variances, being preferred. Tobin [20] showed that MV theory is consistent with expected utility theory in the special case of joint-normally distributed asset returns. The MV approach enjoys a ready acceptance among practitioners, and requires only modest informational and computational inputs. Perhaps its most attractive feature is its ability to decompose the overall portfolio problem into a sequence of much simpler problems: first, the “efficient” set of portfolios (which minimize variance for any given mean return) is calculated, and then the investor chooses one of the efficient portfolios in a manner consistent with his personal preferences. This efficient set is the same for all investors having the same mean-variance-covariance estimates of risky-asset returns, and can, in principle, be determined once and for all using parametric quadratic programming [12, 22] Despite these real advantages, the MV theory embodies certain problems of principle in the case of nonnormally distributed asset returns, and this fact has led to increasing emphasis on the presumably more rational expected-utility theory.

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.

An important issue in the financial literature concerns the conflict between the stochastic dominance (SD) and the mean-variance (EV) methods of choosing optimal portfolios of risky assets. Much of the recent theoretical and empirical work in portfolio analysis has been devoted to the extension and testing of the Markowitz two-moment model, in which it is assumed that either (a) decision makers have quadratic utility functions with negative second derivatives or (b) the probability functions are from some appropriate two-parameter family and the investor is risk averse.

The basic model of this paper is that of a transactor who is to receive at a specified time t in the future a fixed quantity of domestic funds Ad and a fixed quantity of foreign funds Af. It is further assumed that there exists a forward market in foreign exchange in which one unit of foreign currency can be bought and sold at a given and known forward rate rf, the domestic currency price of one unit of foreign currency. Let X be the net forward purchases of foreign exchange that the transactor undertakes at the market rate rf; a negative value of X indicates net sales of forward exchange. It is assumed that at time t the foreign currency will be convertible for the transactor at a fixed but unknown spot exchange rate and that the transactor can assess or derive a probability distribution on this spot exchange rate f(rt) for rt > 0. Finally, it is assumed that the transactor can express a utility function u on the domestic currency equivalent of his ending currency holdings. This paper considers the problem of determining the optimal level of forward exchange purchases X0.