The purpose of this study was to test empirically the risk and return relationships for a mean-variance (E-V) and a mean-semivariance (E-S) capital asset pricing model (CAPM). To date, virtually all empirical work has focused on the Sharpe-Lintner [28,17] E-V model. In the E-V model, the risk of an efficient portfolio is measured by the standard deviation of return, σp. For individual securities, the appropriate measure of risk is the covariance of return on the security and the market portfolio. The E-V model states that the expected return of any security or portfolio equals the risk-free rate of return plus a risk premium that is η times the difference between the expected return on the market portfolio and the risk-free rate of return, i.e.,

where the tildes denote random variables, and

= expected rate of return on security i,

Rf = risk-free rate of return,

= expected rate of return on the market portfolio, and

.

The challenge of leadership is to look beyond the current expansion to consider the long–term outlook for the U. S. economy. My good friend Paul W. McCracken once described this process as looking across the valley to see what is on the other side. His message was: “What will be different on the other side of the valley is far more relevant to business planning than the valley itself.” Such advice is particularly meaningful at this time because of the basic need for more stability in our economic policies.

There is still a great deal of doubt whether we can avoid a capital shortage as economic recovery proceeds. In the near term, one sign of an impending capital shortage will be the appearance of bottlenecks in the industrial sector of our economy. Presently the data on capacity and its utilization are seriously defective.

The Federal Reserve Board, in order to remedy the deficiency of the data, is improving its series on utilization rates. The new series in general will show that we have substantially less unused capacity than indicated by the old series.

My preliminary reading of the improved data, ne ertheless, is that we need not be greatly worried about major bottlenecks well into 1977.

Thereafter, the pace of recovery will be a critical factor. If the economy expands very rapidly, we may not have time to put in place enough capacity to avoid shortages. A moderately paced recovery will give us more time to produce the plant and equipment.

The shareholder equities of most construction lending Real Estate Investment Trusts (REITs) have been rapidly eroded by massive losses. Some trusts, however, have maintained a reasonable degree of stability. Our objective was to statistically analyze variations in the stability of shareholder equity to obtain insights into the operation of the REITs and to suggest possible causal relationships for their lower overall performance.

During periods of increased rates of inflation and the concomitant increase in the level of interest rates, the secondary mortgage market has exhibited a recurring pattern of illiquidity as funds are bid away from the institutions participating in the residential mortgage market. Much of the existing literature and policy addressed to this topic is developed within the framework of the financial disintermediation and credit rationing paradigm. This paper presents an alternative explanation based on the theory of transaction costs and pricing in thin markets.

The purpose of our paper is to examine the impact of output and asset decisions on the pure equity capitalization rate of a monopolistic firm which faces a stochastic demand curve. Within the confines of a specific set of constraints we derive the following conclusions:

1) when assets are fixed and the task of the firm is to find the shareholder wealth-maximizing output, the capitalization rate is functionally related to the level of output, when Leland's Principle of Increasing Uncertainty (PIU) holds the optimal output will occur when the capitalization rate is increasing.

This study provides, as a result of comprehensive search, a better description of the intertemporal behaviors of corporate debt policy, comparable to those that exist for dividend policy. Although leverage policy may vary a great deal from firm to firm, we found that: (1) The rather simple partial adjustment model with constant payout ratio to have the best predictive performance and other superior models include the first-order markov process and the historical average leverage ratio; (2) in general, firms seem to operate with a concept of “target leverage ratio,” e.g., target ratio computed from the partial adjustment models, or from historical or industry averages; (3) there is some weak evidence of the presence of unused debt capacity for the total sample; (4) the average speed of adjustment to close the gap between the desired and actual leverage ratio is a respectable 67 percent in the first year (due to the lumpiness of debt issue, individual firms tend to be either under or overadjusted); (5) there are some indications that firms also adjust debt behavior to anticipated future increases or decreases in assets.

There are several areas for future research, for instance, the best debt model could serve as the first stage of a possible two-stage equation in the empirical verification of the MSM's assumption of the independence of the investment decision to the financing decision (e.g., [7]), on a further exploration of how firms' expectations affect debt behavior. Finally, the existence of a rational target leverage ratio should encourage research interest concerning the existence of an empirically testable optimal leverage ratio.

The prime purpose of the paper is to investigate the portfolio building implications of government transfers. Some general comments are also made with regard to human capital payments. As such this paper can be seen as a generalization and further simplification of the work by Mayers.

A two period model of bank behavior is developed where the bank chooses, at the beginning of period one, optimal levels of loans, securities and debt. Given perfectly illiquid loans, perfectly liquid securities investments, and alternative assumptions about the liquidity and cost of debt, the bank chooses the endogenous variables as follows: (1) If the marginal cost of borrowing everywhere exceeds the marginal return to securities then: a) near the trough of the loan demand cycle marginal returns on securities and loans are equated and debt is zero; b) in the center of the loan demand cycle all deposits are committed to loans as their marginal return exceeds the marginal return on securities but is less than the marginal cost of debt; c) near the peak of the business cycle securities are zero and non-deposit liabilities are acquired until their marginal cost is equal to the marginal return on loans. (2) If the marginal cost of borrowing is, in some range, less than the marginal return to securities, then instead of possibility b) above, the bank will borrow to finance both loans and securities as a precaution against the prospect of future borrowing at a higher cost.

Concern for the social objective of an efficient financial system led several researchers durnng the 1960's to study economies of scale in financial intermediation. These studies were used to draw inferences regarding an optimal structure of financial institutions. Today, there is added reason for the concern for the social cost of providing financial intermediary services. Since 1966, deposit rate controls have been extended to savings and loan associations as well as other thrift institutions whereas the Banking Act of 1933 had previously extended these controls to commercial banks.

The purpose of this paper is to compare the performance of stocks and mutual savings and loan associations. Since the philosophies underlying stocks and mutuals supposedly differ, assertions are often made that operational differences also exist. The profit motive is presumed to dominate the operations of stock associations while mutual associations are said to be operated more in the interest of the general public. As the pressure to allow more conversions increases, the question of whether significant differences in operating characteristics exist becomes increasingly important.

The focus of our study concerns the information effect of newly reported data. Our time frame of reference is the period after the data become available. The information we analyze is generated by a multivariate model which utilizes publicly available data. We concentrate on an extremely poor performing group of companies where the new information indicates a change in status from a going concern to a potential bankruptcy; i.e., the firms possess characteristics similar, to other firms which were bankrupt in the past. Our sample, however, is comprised only of firms which, in fact, did not fail.

A temporary trading suspension in a listed security represents a temporal discontinuity in a continuous auction market. Although the SEC occasionally suspends trading in specific securities, the NYSE itself administratively halts trading in individual NYSE issues. The latter occur quite frequently (almost three per day on average), and typically last about two hours. NYSE-initiated suspensions are the focus of the present paper.

What we say here will surely have little effect on curriculum evolvement since changes in subject, content, and emphasis follow on the heels of significant improvements in theory or dramatic changes in the institutional setting, rather than on teacher preferences.

The purpose of this paper is to describe a computerized classroom teaching tool for use in money and banking courses. A basic macroeconomic model and simulation program are introduced, along with classroom presentations and sample output. In addition, the technical details of the simulation, including operating costs, are explained.

Like any course, the basic money and financial institutions course, or money and banking as it is more frequently designated, takes on the unique coloration of the instructor. However, this course appears to be so affected more than most other finance and economics courses at this level. This occurs because, although it is a second course, it is still a very broad course in design, and more importantly, because it encompasses the three approaches to the teaching of economics and finance–description, theory, and policy. Different instructors emphasize different aspects, at times, to the almost total exclusion of one or both of the other two. But, judging from the financial failure of textbooks that have attempted to focus on just one of these aspects, say, financial institutions or monetary economics, it appears that most instructors prefer the broader and more diffuse coverage. And so do I.

To discuss what's right and wrong with the teaching of contemporary money-andbanking courses, we must first distinguish the various species of courses that fall under the M&B genus. In economics departments, the undergraduate M&B course is conceived prototypically in either of two ways: (1) as a basic macroeconomics course, including in principle (though often not in practice) an introductory swipe at international finance, or (2) as a policy course focusing on the art of central banking, including an obligatory introduction to opportunities for intervention in foreign-exchange markets. For convenience, let's call these alternative course conceptions (M&B)1 and (M&B)2, respectively. In business-school finance departments, M&B courses seek primarily to explain how contemporary financial markets and institutions work. These courses develop analytical descriptions of different types of financial transactions, instruments, transactors (with special emphasis on the roles played by intermediaries, dealers, and brokers), and contract terms (with special focus on implicit and explicit yields). Whereas MBA-level offerings are of negligible importance to the typical economics department, they represent a sizeable portion of the finance-department M&B market. Undergraduate M&B courses in finance departments–(M&B)3–differ from MBA-level ones–(M&B)–in assuming that students possess little background or interest in macroeconomic theory per se. (M&B)4 courses shape up as a linear combination of (M&B)3 and either or both (M&B)1 and (M&B)2.

Models of return generation for securities are potentially important for a number of reasons, including their possible utility in normative portfolio construction. Multi-index models of the process are frequently suggested as an alternative to the familiar single-index models, but, while the multi-index models are intuitively appealing, their empirical superiority remains largely undemonstrated. This paper examines the extent to which three multi-index models succeed in eliminating dependence in the return residuals for a portfolio of common stocks. The relevance of this research lies in the promise that, while obviously requiring additional inputs to determine the efficient set of portfolios, multi-index models may succeed in identifying a more accurate set of efficient portfolios.

Employing a stochastic scenario approach and the capital asset pricing model, this study examines the position of shareholders in a hypothetical (modal) savings and loan association (SLA) holding a variable-rate mortgage (VRM) portfolio relative to the position of shareholders in an association holding fixed-rate mortgage (FRM) instruments. Because of the impossibility of accurately forecasting interest rates far into the future, the scenario approach was utilized to compare the two mortgage forms under simulated rising, falling and zero trend interest rate environments over a 30-year amortization period. Each scenario was generated by randomly selecting values from a distribution of first differences extracted from historical values of the Federal Home Loan Bank Average Cost of Funds Index.

The performance of firms operating in highly concentrated industries continues to be of interest. Substantial empirical research has focused on shareholder benefits in the form of book equity returns. Research by Bain [1] and by Mann [6], as well as others, found that higher rates of return on equity capital are associated with greater market power (measured by industry concentration ratios and entry barriers).