In this paper we have dealt with several time dependent cash balance models and have solved them using some form of a control theory maximum principle. The kinds of solutions we obtained were intuitively satisfying from a financial analysis point of view. The main effort for the future will be to extend these very simple models to much more realistic and complicated ones. But to do this will require considerable theoretical research in the area of both deterministic and stochastic control theory. We hope that we have demonstrated the usefulness of these theories in the area of finance and we expect many similar applications to be made in the future.

This paper applies a single measure of investment performance to mutual fund portfolios for the 20-year period 1948–1967. It criticizes the efficacy of market indices, at least for the purpose of evaluating aggregate results of managed portfolios; it tests the predictive value of past results in forecasting future performance; and finally, it identifies two factors that are positively related to fund performance during the time period studied.

The determinants of prices of common stocks have been studied extensively by both academicians and practitioners. Differences in points of view between these two groups are evident in their corresponding interpretations of market behavior, which is represented by the assumedly contradictory random walk and intrinsic value “hypotheses.”

In two previous articles [11] and [12] a family of normative models of the individual's economic decision problem under risk was presented. At the same time, certain implications of these models with respect to individual behavior were deduced for a class of utility functions. This paper will show that these models also give rise to an induced theory of the formation and operation of firms under risk for the same class of utility functions.

The relationship between return on assets and their riskiness is one of the liveliest topics in financial literature. In his 1952 landmark article, Markowitz developed a mathematical model that captured this key financial concept. defined risk as the variance of the rate of return of a portfolio. Later, Sharpe hypothesized a positive linear relationship between expected rate of return on an asset and the risk premium associated with that asset. Subsequently, Sharpe tested this hypothesis empirically and found support for his theory. Although portfolio theory specifies the two parameters of this model as ex ante return and risk, Sharpe used ex post data for testing the risk-return relationship. designated the ex post mean rate of return obtained on an an asset as a proxy for expected return and the standard deviation of ex post annual rates of return as a surrogate for risk.

A useful distinction is sometimes maintained between business risk associated with uncertainty of receipts generated by a firm's assets and financial risk defined as the probability of incurring penalty costs stemming from liability claims on assets and asset yields. In fact, disagreement in recent literature on the exact role of capital structure in market valuation of business firms is easily interpreted once the risk assumptions of the literature such as perfect certainty, business risk, and financial risk have been identified.

Stocks differ in the variability of their prices; thus, as the level of stock market prices swings periodically, one observes a change in structure as the prices of more volatile issues change relative to those of a more stable character. Here we attempt to empirically establish some of the differentiating characteristics of these volatile issues. In doing so we add to the empirical and analytical work of Fritzemeier [4], Clendenin [2], Latané [7], Malkiel [8], and Heins and Allison [6]. Only the last of these efforts used regression techniques.

A normative theory of capital budgeting requires determination of the correct cost of capital for the evaluation and selection of risky investment projects. Since different uses of funds within the firm may involve different degrees of uncertainty, the normative theory should take into account the effects of changes in the composition of the firm's portfolio of productive assets on its market valuation. The normative theory must therefore be based on a positive theory of market valuation. The objective of this paper is to develop and test an empirical specification of the positive theory.

A great deal of interest has been expressed by economists and policy-makers concerning the adequacy of the financing of small and, especially, new firms. This paper presents an empirical study of the adequacy of one particular source of funds—outside equity.

Individual decisions about investment may be regarded as choices among alternative probability distributions of net returns. It is assumed that these distributions are completely known and independent of initial wealth positions, and that individuals determine the preferred portfolio of investment in accordance with a given, consistent set of preferences.

Considerable attention has been given in recent years to studies of the cost of capital and investor preferences for dividends, but empirical analysis of the various theoretical propositions has been complicated by numerous difficulties associated with estimating the parameters in question. In many of the empirical studies, ordinary least squares has been the statistical method applied because, under certain assumptions, ordinary least squares produces unbiased estimates with a minimum of variance. However, the validity of one of the assumptions, namely, that all independent variables contain no measurement error, has been questioned by numerous writers. More specifically, it has been argued that investors tend to ignore temporary or random disturbances in current reported earnings. Thus, values of current earnings that are actually observed for the statistical study may be different from those values which ideally would be observed; i.e., they may contain measurement error, the size of which is reflected by the difference between the current reported earnings and the values on which investors presumably base their decisions. For example, in such least squares regressions as price on dividends and retained earnings, the impact of the measurement error is considered to fall mainly on the retained earnings, since dividends are thought to be relatively stable.

In an earlier paper [2], the sequential decision process was applied to two major facets of credit management: (a) deriving unambiguous decision rules for handling individual credit requests; and (b) devising relevant credit indices for effective management control and evaluation of the system. Usefulness of the model was constrained by its static nature and by exogenous determination of other significant variables, notably, collection efforts and costs.

This paper describes the development and testing of a model of bank portfolio selection that considers variability of both income and gross asset levels as the risks involved in banking. In particular, the model is formulated as maximizing expected profit subject to risk constraints on wealth losses and the availability of liquid assets. The parameters for these constraints include the covariance matrices of rates of return on bank assets and deposit changes. Included in the latter category are fluctuations in business loans which are treated as negative deposits because, due to deposit feedbacks and the like, these can reasonably be considered exogenous to the short-run portfolio decision. Basically, the model is an extension of Markowitz's work [11] to incorporate problems associated with portfolios that include assets having imperfect markets and liabilities that are not completely under the control of the economic unit. As such, it is applicable (with minor institutional modifications) to the entire spectrum of financial intermediaries.

Deposit variability in banking has received substantial attention in recent empirical studies [1], [2], [3], [4], [5], and [7], Most of these efforts have been cross-section analyses of the determinants of variability. However, the impact of branching on deposit variability has not been tested in any of these studies. Wacht suggests that branching could reduce deposit variability substantially, especially if geographical dispersion could be achieved through relaxing interstate restrictions on branching [6]. In this paper, Wacht's suggestions will be subject to empirical testing for one thrift institution located in a major eastern metropolitan area. In Section I, the test methodology is presented. Data sources and empirical results are discussed in Section II, while the study is summarized and the implications for future research are discussed in Section III.

Based upon the ubiquitous nature of cash flow projections in the decision-making process, it would be desirable to be able to find answers to questions of the following form:

(1) How does the level of variability in demand affect the cash outflows for payment of accounts payable liabilities?

(2) Does the method used in planning production influence the firm's cash flow patterns?

Analysis of existing attempts to model the cause and effect relationships within the cash flow process reveals that the ability to answer questions similar to the ones posed above does not exist. The research accomplished to date can be characterized as being definitional and hypothetical; cash flows have been defined, lists of factors that may influence cash flow patterns have been postulated, and simple examples of what may happen to cash flow patterns have been constructed. Although these preliminary steps are necessary, they are not sufficient for a thorough understanding of the cash flow process. Analysis must be undertaken to establish the cash flow consequences of various combinations of environmental and organizational factors.

Economic analysts following the mean-variance maxim have concentrated upon the problem of portfolios as financial assets with little or no effort being directed to the inclusion of productive liabilities. Accordingly, the usual portfolio analysis assumes the absolute level of funds available for investment as fixed and concerns itself only with the distribution of that given amount over candidate opportunities. In a wide variety of applications, neither part of this restriction is either essential or desirable. The management of insurance companies is a particularly important area that could benefit from an extension of portfolio techniques to accommodate liabilities as a variable factor. Subsequently, alternative levels of funding, through both underwriting and long-term debt, could be investigated for their attendant expected return and risk contributions to the corporation's overall financial posture.

In this paper, a simple model of individual financial decision making is used (1) to construct the market demand curve for common stock, and (2) to question the appropriateness of market value maximization as the objective of corporate financial management.

Researchers and political analysts concerned with the inter-regional flow of mortgage funds have often pointed to the existence of yield differentials as prima facie evidence of misallocation of capital and national resources. Limited information and myopic lending horizons, with market imperfections reinforced by state laws and institutional segmentation, have been postulated. They are regarded as responsible for costly “frictions” in the export of capitalto the fast-growing, generally low-income, states, particularly those of the South. Both federal and state legislative action, intensified private arbitrage, and better secondary market facilities and instruments are then urged to improve inter-regional financial mediation to reduce or eliminate the yield differentials.

In recent years, large commercial banks in the United States have turned to so-called “liability management” as a way to acquire additional funds. The use of Certificates of Deposit (CD's), Eurodollar balances, debentures, and recently the issuing of commercial paper through their holding companies represent an extension of the more traditional secondary reserve asset management approach to bank liquidity and reserve adjustment.

Recent literature, as it has been developing in this journal and others, suggests that a significant change has taken place in the field of finance. The “new finance” has broader and deeper analytic and empirical content. Its relevant characteristics are: (1) a weakening of the traditional distinction between security analysis and corporation finance; (2) an increased emphasis upon financial management as an integral part of the overall management function; (3) greater emphasis upon the relevance of economic theory in the analysis of financial relations; and (4) more attention to the measurement and testing of hypotheses.