I. Introduction, 303.—II. Model and comparative static properties, 306.—III. The influence of market power on equilibrium per unit discretionary expenditures, 312.—IV. Concluding remarks, 314.—Mathematical appendix, 315.

The Galbraith-Caves conjecture that ".. a significant portion of the potential profits in... (a firm's)... position of market power is taken in the form of avoiding uncertainty " [Caves, 1970, p. 284] has recently received theoretical and empirical attention in an important paper by Edwards and Heggestad [19731—henceforth referred to as EH. Following Lintner [1970] and others, EH assume that price-setting firms maximize the expected utility of profits. A specific utility function, (1) U(11) = a — be-2"f 1, is employed, where a and b are constants and 2a is the coefficient of absolute risk aversion. Assuming further that Fr oi), maxi-mizing expected utility can be shown to be equivalent to maximizing the certainty equivalent (2) = — «air. The expression for the firm's expected utility, or equivalently II, yields indifference curves in H space that are linear with a positive slope equal to lia. Market opportunities open to the firm are contained in the "efficient opportunity set, " a notion borrowed from the theory of finance [Edwards and Heggestad, 1973, p. 461]. Preferences and opportunities are brought together in Figure I, which constitutes the crux of EH's theoretical analysis. In addition to determining the firm's optimal II, a 2 „ configuration, e.g., points X and Y, the diagram is used to show that (i) higher risk aversion (a condition that is thought to characterize the management of firms with market power) 1 or (ii) a uniform, rightward, shift of the efficient opportunity set (firms with greater market power are thought to be able to extract _ more expected profit for any given variance of profit) will lower o-2,r/II, the EH measure of risk undertaken by firms. The We are indebted to F. R. Edwards, J. Green, A. A. Heggestad, and C. Southey for helpful comments on an earlier draft. 1. For a discussion of this proposition, the reader is referred to, among others,

When constructing a portfolio of stocks, do you turn a blind eye to the firms’ future outlooks based on careful consideration of companies’ fundamentals, or do you ignore the stocks’ correlation structures which ensure the best diversification? The Fundamental Indexing (FI) and Markowitz mean-variance optimization (MVO) approaches are complementary but, until now, have been considered separately in the portfolio choice literature. Using data on S&P 500 constituents, we evaluate a novel portfolio construction technique that utilizes the benefits of both approaches. Relying on the idea of forecast averaging, we propose to blend the two previously mentioned techniques to provide investors with a clear binocular vision. The out-of-sample results of the blended portfolios attest to their superior performance when compared to common market benchmarks, and to portfolios constructed solely based on the FI or MVO methods. In pursuit of the optimal blend between the two distinct portfolio construction techniques, MVO and FI, we find that the ratio of market capitalization to GDP, being a leading indicator for an overpriced market, demonstrates remarkably advantageous properties. Our superior results cannot be explained by classic asset pricing models.