Knowledge that Transforms

Samuel E. Bodily, Chelsea C. White, Optimal Consumption and Portfolio Strategies in a Discrete-Time Model with Summary-Dependent Preferences, The Journal of Financial and Quantitative Analysis, Vol. 17, No. 1 (Mar., 1982), pp. 1-14

Bawa [3] has argued that mean-lower partial moment portfolio selection rules are more general than mean-variance rules in that they rely on fewer restrictive assumptions regarding investor utility functions and/or distributions of security returns. As with the mean-variance model, it is possible to formulate equilibrium security prices under the assumption that expected utility-maximizing investors utilize mean-lower partial moment portfolio selection rules. This paper has investigated the empirical relationship between the resultant mean-lower partial moment pricing model and the long established mean-variance pricing model.

This paper differentiates between country risk--the probability that a country will default on its obiigations--and two forms of international banking risk: (1) the extent to which a bank's foreign activities affect the cost of equity capital; and (2) the extent to which a bank's foreign activities affect the probability of bankruptcy. The paper focuses on the latter form of international banking risk.Using Chebyshev's Inequality, it is pointed out that the risk of bankruptcy is influenced by the mean as well as the variance of the return distribution. Consequently, restrictions on the (international) composition of a bank's portfolio may increase rather than reduce the probability of bankruptcy.

Sudhakar D. Deshmukh, Stuart I. Greenbaum, Anjan V. Thakor, Capital Accumulation and Deposit Pricing in Mutual Financial Institutions, The Journal of Financial and Quantitative Analysis, Vol. 17, No. 5 (Dec., 1982), pp. 705-725

Gordon J. Alexander, P. George Benson, Carol E. Eger, Timing Decisions and the Behavior of Mutual Fund Systematic Risk, The Journal of Financial and Quantitative Analysis, Vol. 17, No. 4, Proceedings of the 17th Annual Conference of the Western Finance Association, June 16-19, 1982, Portland, Oregon (Nov., 1982), pp. 579-602

The relationship between heterogeneous expectations on the part of investors with respect to a security's future return and asset prices is an area of increasing interest in finance. Theoretical examples include Miller [14], Williams [23], and Jarrow [8]. Empirical examples include Bart and Masse [1] and Peterson and Peterson [18]. Miller, Bart and Masse, and Peterson and Peterson address issues related to whether an increase in divergence of opinion will lead to an increase in an asset's price. Unfortunately, little is known of how different types of changes in investors' probability distributions of returns influence asset returns. An even more basic problem is that it is not clear what is meant in terms of investor probability distributions when it is said that divergence of opinion increases or decreases. The answer to this problem has important implications for understanding equilibrium price.

Little attention has been given to the behavior of option portfolio risk across different portfolio sizes, perhaps because many individuals view unhedged long option positions as too risky for rational investor consideration. It appears possible, however, to combine long option positions with less risky assets to produce portfolios with favorable risk-return characteristics [10].

A number of studies have compared the investment risk of various industries and of various individual corporations in developed countries (DCs). The purpose of this paper is to compare investment risk in DCs with less developed countries (LDCs). The variance of returns to investment in common stocks provides a natural measure of investment risk and will be used in this study. Studies in LDCs include work of Levy and Sarnat [12], [13]. Errunza [3], [4], and Lessard [11]. Levy and Sarnat and Errunza found low economy-wide investment risk on an average for LDCs (relative to DCs), with stock indices being used as surrogates for economy-wide risk. These results are not unambiguous, however, because there are probable difficulties due to infrequent trading and averaging in the broad market indices used in the above studies. Hence, we use a sample of the largest corporations that suffer little, if at all, from thin trading and/or averaging.

This paper uses the portfolio theory approach to bank behavior theory in order to examine the effects of two Fed policy variables on bank portfolio riskiness. The policy variables are (1) the level of the reserve requirement against NOW accounts, and (2) the rate of interest paid by the Fed on bank reserves. This second policy variable is currently zero-valued in nominal terms, but in recent years there has been some discussion of raising it, especially now that interest is paid by banks on checkable accounts. (For an early discussion see Tobin [8].)

In a paper published in 1978, Levy [5] proposed a general capital asset pricing model (GCAPM), which he obtained by maximizing investors' utility when the number of securities held in each investor's portfolio is constrained. Although Levy's resultant asset pricing model is somewhat different in appearance than the asset pricing model proposed by Mao [8] in 1971, it can be shown that both models are not only quite comparable in content but that both result in some very promising theoretical and empirical implications. Thus, the purpose of this paper is twofold. First, these two important contributions to the literature on asset pricing in imperfect markets will be compared and contrasted. Second, it will be shown that both models can yield a “clinical” form of the traditional CAPM, which appears to be more desirable for empirical testing purposes.