Knowledge that Transforms

Cheng F. Lee, Frank C. Jen, Effects of Measurement Errors on Systematic Risk and Performance Measure of a Portfolio, The Journal of Financial and Quantitative Analysis, Vol. 13, No. 2 (Jun., 1978), pp. 299-312

Christopher B. Barry, Effects of Uncertain and Nonstationary Parameters Upon Capital Market Equilibrium Conditions, The Journal of Financial and Quantitative Analysis, Vol. 13, No. 3 (Sep., 1978), pp. 419-433

Evaluating investments by discounting anticipated future benefits at an exogenously determined risk-adjusted discount rate (hereafter referred to as the RADR approach) is well accepted in the canon of finance. If benefits (D) are to be received for T periods and if k, the discount rate, is constant over each of the t periods, then the discrete time net present value (NPV) is de-fined as: T t (1) NPV = E D /(l + k). t=0 A positive NPV characterizes a desirable investment. A frequently offered criticism of the RADR approach centers on the fact that both risk and timing considerations are treated in the denominator of equation (1). The certainty equivalent (CE) method has been suggested as a way of distinguishing between the two effects. In computation of the CE-NPV, riskless benefits that are equal in utility to the risky projected benefits

Bradford Cornell, J. Kimball Dietrich, Mean-Absolute-Deviation Versus Least-Squares Regression Estimation of Beta Coefficients, The Journal of Financial and Quantitative Analysis, Vol. 13, No. 1 (Mar., 1978), pp. 123-131

Ronald Lanstein, William F. Sharpe, Duration and Security Risk, The Journal of Financial and Quantitative Analysis, Vol. 13, No. 4, Proceedings of Thirteenth Annual Conference of the Western Finance Association, June 20-26, 1978 (Nov., 1978), pp. 653-668

An important aggregation problem is the derivation of equilibrium security prices which are independent of the allocation of initial wealth among investors. The problem is of interest because, if investors are conceived as being endowed with initial holdings of securities, it is clear that the initial wealth allocation which depends on security prices is endogenous to the model. Although he addresses a differently defined objective, Rubinstein [8] has shown that sufficient conditions for the solution of the problem described above are conditions that permit construction of “composite” (representative) investors whose resources, beliefs, and tastes depend on the exogenous specifications of the economy (viz., the beliefs and tastes of all investors and production conditions) but not on the initial allocation of securities.

Short interest is the number of shares of a stock borrowed for sale (and not yet replaced) by investors who anticipate a decline in the stock's price. After its price falls, the stock is purchased to replace the borrowed shares, the selling price being higher than the purchase price whence the profit. The New York and American Stock Exchanges disclose the current outstanding short interest for the market as a whole and for selected stocks around the 15th of each month.

After Markowitz [14, p. 100] and Sharpe [19, 20] suggested estimating the beta systematic risk coefficient for market assets, finance professors, stock brokers, investment managers, and others began expending large quantities of resources each year on estimating betas. Unfortunately however, it appears that the ordinary least-squares (OLS) regressions used in nearly every instance may be inappropriate. This paper suggests that many stocks' beta coefficients move randomly through time rather than remain stable as the OLS model presumes.

Capital market equilibrium has been extensively studied in the recent past, mostly in a mean-variance framework. In a perfect capital market with riskless assets and homogenous expectations among risk-averse investors, Sharpe and Lintner have shown that the efficient set of all investors could be described by only two portfolios (or mutual funds):(1) the market portfolio(2) the riskless asset.

G. O. Bierwag, George G. Kaufman, Chulsoon Khang, Duration and Bond Portfolio Analysis: An Overview, The Journal of Financial and Quantitative Analysis, Vol. 13, No. 4, Proceedings of Thirteenth Annual Conference of the Western Finance Association, June 20-26, 1978 (Nov., 1978), pp. 671-681