Knowledge that Transforms

Rodney L. Roenfeldt, Gary L. Griepentrog, Christopher C. Pflaum, Further Evidence on the Stationarity of Beta Coefficients, The Journal of Financial and Quantitative Analysis, Vol. 13, No. 1 (Mar., 1978), pp. 117-121

Empirical research has played an important role in recent theoretical developments in the theory of finance, particularly in the formulation and testing of various theories of capital asset pricing. A common procedure in much of that empirical research is to use historical price and dividend data to estimate the parameters of a characteristic line which relates the return on an asset or portfolio to the return on the market. While several possible limitations of such procedures have been explored, one recurring question is the appropriate length of each interval used in the estimation. The purpose of this study is to investigate intervaling in greater detail so as to better understand its impact on the results of empirical research and hence of further developments in the field of finance. This is accomplished by examining the effect of different intervals on the return distributions and estimated characteristic lines of 200 common stocks over the two decades 1950–1969. Section II reviews the relevant literature and attempts to place the intervaling effect in perspective. Research design for the investigation is described in Section III, and findings are presented in Section IV. A brief conclusion appears as Section V.

Two methods for deriving efficient sets involve either the Markowitz [3] approach, where every security can be viewed as being related to an index unique to itself, or the Sharpe [4] single-index model, where every security is related to the same index. Given the extreme differences between these models, Cohen and Pogue [1] developed two intermediate models. They found that the efficient set derived from the Sharpe single-index model came closer to approximating the Markowitz model's efficient set than their models when empirically tested on a sample of common stocks. Subsequently a similar test was performed by Wallingford [6] which yielded contradictory conclusions.

The purpose of this paper is to show that the internal rate of return (IRR) even when unique and real may nevertheless be an incorrect measure of the return on investment, and to prove that all projects characterized by negative flows occurring only at the beginning and end will be mixed investments for which the IRR, whether unique and real or not, is not a correct measure of investment return.

In a recent issue of JFQA, Aucamp and Eckardt [1] (henceforth referred to as AE), developed a new sufficient condition for the existence of a unique (and simple) nonnegative internal rate of return (IRR), which includes the one previously formulated by Norstrøm [8] as a particular case. As pointed out by the former authors, their new procedure is appealing since it is easier to apply than the rather involved Sturm-Kaplan [6] method, while being a refinement of Norstrøm's result.

Several years ago Sharpe suggested a measure for the evaluation of portfolio performance. The measure was conceptually simple, easily calculated, and applicable to an entire investment portfolio, in contrast to the measures of Treynor and Jensen which measure only the undiversifiable risk in a portfolio. Sharpe's measure is still a frequently recommended tool for measuring portfolio performance. The measure is, however, biased. It is the purpose of this note to demonstrate the existence of the bias, indicate its size, and provide a means of correcting it.

In a recent article in this Journal Joy and Tollefson [10] (hereafter J&T) critically analyzed discriminant analysis and its application to bankruptcy analysis. The authors make several interesting points and provide a useful discussion of the application of this statistical technique in finance. There are, however, three aspects of their presentation which need further elaboration. These relate to their discussions of (1) the difference between the stability of the discriminant model and its predictive ability, (2) the alternative methods of making inferences about the relative discriminatory power of variables, and (3) the reference statistics to use in assessing classification efficiency. In commenting on these points we will make use of the data from the Altman [1] study as did J&T.

As the multinational corporation (MNC) becomes the norm rather than the exception, the need to internationalize the tools of domestic financial analysis is apparent. A key question is: What cost-of-capital figure should be used in appraising the profitability of foreign investments? This paper seeks to provide a comprehensive approach to analyze the cost-of-capital question. It begins by extending the weighted cost-of-capital concept to the multinational firm. It then builds on previous research to address the following related topics: national or multinational financial structure norms; the role of parent company guarantees; the costing of various fund sources particularly when exchange risk is present; the impact of tax and regulatory factors; risk and diversification; and joint ventures.

Jonathan E. Ingersoll, Jr., Jeffrey Skelton, Roman L. Weil, Duration Forty Years Later, 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. 627-650

William F. Sharpe, Bank Capital Adequacy, Deposit Insurance and Security Values, 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. 701-718