Knowledge that Transforms

Traditional models of portfolio selection assume that all assets are traded in competitive markets, so that rates of return to any individual investor are fixed. This paper represents an extension of portfolio theory to the case in which asset markets are not perfectly competitive and rates of return cannot be taken as given. Klein [10] has noted that, when asset markets are imperfect, the separation theorem no longer holds but does not solve explicitly for the relationship between risk and return. Here for simplicity we shall consider the case of the investor who has a monopoly in an asset he creates, so that its risk and return characteristics are determined by the decisions of the portfolio selector and hence are endogenous. It will be shown that even if the market for an asset in the portfolio is imperfectly competitive, as long as the demand curve for the asset is well behaved, the locus of efficient portfolios facing the investor, which is composed of combinations of the riskless asset and the optimal combination of risky assets, will be a concave function, as opposed to a linear function in the competitive case. In other words, the introduction of capital market imperfections does not affect the positive slope of the efficient set of portfolios. Moreover, the expected return on the imperfectly competitive asset will be shown to be easily decomposable into the standard risk premium and a monopoly premium.

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R. N. Anderson, John A. Haslem, John B. Leonard, An Empirical Analysis of the Impact of Branching on Demand Deposit Variability, The Journal of Financial and Quantitative Analysis, Vol. 11, No. 3 (Sep., 1976), pp. 455-464

This article develops a criterion for comparing warrant financing with further common stock financing from the viewpoint of a firm's current stockholders. This criterion is then related to a complementary one presented by Bierman [1] and a condition is imposed on Bierman's cost of warrant financing for warrant financing to be preferred to further stock financing. Finally the article considers the limitations of these criteria and qualitatively discusses risk considerations that influence the attractiveness of warrant financing.

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

Several studies have investigated the reaction of the stock market to a firm's changing its method of accounting for external reporting purposes. By contrast, this study investigates the reaction of proper subsets of the stock market to changes in accounting methods–specifically, the reaction of the set of investors in the common stock of the firm which has changed its accounting measurement rules.

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In a recent article in this journal [6], Clement G. Krouse and Wayne Y. Lee (hereafter K-L) presented a model of optimal equity financing of a corporation based on Pontryagin's maximum principle. In this note the basic assumption of a constant internal rate of return of the K-L model is relaxed. As a result, the financial implications of the K-L results remain essentially unchanged, but their applicability is extended considerably, and some undesirable solution characteristics are eliminated.

This paper examined the empirical consequences of explicit consideration of purchasing power risk in portfolio decisions. It was shown that, during a period of significant inflation, the differences between the variance-covariance relations of nominal rates of return and those of real rates of return were sufficiently pronounced to change the composition of investment portfolios. Further, it was shown that the set of real efficient portfolios dominates any investment strategy that ignores purchasing power risk.

William Breen, John Boyd, Classroom Simulation as a Pedagogical Device in Teaching Money and Banking, The Journal of Financial and Quantitative Analysis, Vol. 11, No. 4, 1976 Proceedings (Nov., 1976), pp. 595-606