Knowledge that Transforms

The purpose of this note is to demonstrate that the explicit introduction of consumption patterns alters the traditional relationship between expected return and variance presented by Markowitz, Tobin, Sharpe, Lintner, and others.

All the stock price models discussed in this paper are based on the assumption that the present value of a share of common stock is equal to the discounted value of all future expected dividends accruing to the stockholder:where Po : current value of a share of common stock, Dt: dividend expected to be received at end of period t, k : investor's discount or time-value rate, andt : time.

The problem considered in this paper is the optimal expansion or contraction of credit by a single bank in response to a change in its reserve account. Such a change is usually not of an exogenous nature when the entire operations of the bank are considered. Quite often, the change in the reserve position comes as a result of the bank's decision to engage in securities transactions, thereby changing its mix of reserves and securities without affecting the total asset position of the bank. We do not consider the overall portfolio selection problem faced by the bank; we assume that changes in the reserve account from such decisions are exogenous to our models.

Edgar D. Cook, Jr.*: Harry C. Friedman in his paper, Real Estate Investment and Portfolio Theory, has put his mind to an increasingly important area of financial concern, the relationship of real estate as a security in developing portfolio theory. Between now and the year 2000, it has been estimated that $1,500 billion will be spent on building and remodeling nonfarm housing. There will be an estimated $1,000 billion spent on commercial, industrial, and utility construction. In addition, $1,000 billion will probably be spent on public utilities and service institutions, plus $30 billion annually on community facilities. It is anticipated that each year in coming generations we will add to our existing inventory the equivalent of fifteen cities of 200,000 persons each. Predictions are that there will be a need for an additional 2 million dwelling units per year during the 1970's and that this need will climb steadily thereafter.I

During the “credit crunch” of 1966, starts of single-family residences fell 19.2 per cent, from 964, 000 to 779, 000. At that time, 10 states had usury laws limiting the maximum nominal interest rate that could be charged to individuals on residential mortgages to 6 per cent. When interest rates rose to high levels in 1966, there were widespread complaints that this artificial restriction caused residential construction to decline by even larger amounts in those states having 6 per cent usury laws as lenders shifted funds to other states not having this restriction. However, when nominal interest rates rise to the legal maximum, mortgages trade at a discount and the effective yield rises above the legal rate. Presumably, it is the effective yield, not the nominal rate, that is relevant for directing the flow of funds into alternative investments. Thus, there is good reason to doubt that the usury laws did restrict residential construction in spite of the contention by those in the mortgage and construction industries. The purpose of this study is to determine if—and if so, to what extent—state usury laws caused a decline in residential construction in 1966.

Donald L. Tuttle, William L. Wilbur, A Multivariate Time-Series Investigation of Annual Returns on Highest Grade Corporate Bonds, The Journal of Financial and Quantitative Analysis, Vol. 6, No. 2 (Mar., 1971), pp. 707-721

Recently, Cohen and Gujarati [2] have suggested that when multicollinearity is present there is “ …danger involved in mechanically dropping variables from multiple regression equations by t tests because t values of the regression coefficients may not be significantly different from zero when the true (population) values of these coefficients are in fact not zero…” The problem they discuss is not a new one and has been extensively treated in the existing literature. However, their approach is straightforward and will certainly aid the practitioner in his understanding of the problems associated with multicollinearity.

For some time there has been disagreement among financial economists as to the effect of dividend policy on the valuation of a firm under conditions of uncertainty. On one side of the debate Miller and Modigliani (MM) [11] argue that the capitalization rate on shares is independent of the dividend policy of the firm. Gordon [6], [7], [8], and others, on the other hand, reject this proposition and present theories of valuation where share prices and capitalization rates are very much dependent upon the dividend policies of firms.

In a recent paper by Lusztig and Schwab, a sensitivity analysis was performed on a linear programming capital budgeting problem where selection of projects is based on the criterion of present values. Their model is typical of current practice in the literature, and it is the point of this paper to indicate that a better model exists which allows more flexibility of assumptions and will yield the same results as a present value criterion. The model to be presented here uses a terminal value (horizon value) criterion for selection of the optimum set of investment projects.

The purpose of this paper is to consider some problems arising in several applications of the theory of portfolio analysis pioneered by Markowitz [8] and Tobin [13]. This theory of asset choice under uncertainty has been applied to a large and growing set of problems beyond the original application to the selection of the investor's optimal portfolio, e.g., the capital budgeting decision of the firm (Lintner [7]), international capital flows (Grubel [5]), the choice of an export mix for a country (Brainard and Cooper [1] and the flow of direct investment (Stevens [12] and Prachowny [10]). In all applications a common element is the set of efficient portfolios which, in turn, is determined. by the set of moments—means, variances, and covariances—of the returns from the different assets that are. Considered for inclusion in the portfolio.