A perfect capital market is a key assumption in recent theories of security pricing. It is assumed that the costs of transactions, information-gathering, and portfolio management are all zero, and that no investor is so large as to exert an appreciable effect on either the risk-free interest rate or the yield on risky securities. If, in this perfect capital market, investors have identical decision horizons and homogeneous expectations, then there is a unique optimal portfolio of risky securities. Since this unique portfolio must include every security in proportion to its relative valuation in the capital market, it is referred to as the “market” portfolio. When the capital market reaches equilibrium, the expected return of every security will be a linear function of the expected return of the market portfolio. From this relationship Lintner and Mossin have separately derived valuation formulas that express the market price of a security as a function of the security[s end-of-period expected value, its risk as measured by the variance and covariances of this end-of-period value, the market price of risk within the portfolio, and the risk-free rate of interest.

In “An Investigation of the Extrapolative Determinants of Short-Run Earnings Expectations,” Professor McEnally has presented a wide spectrum of research results dedicated to the following questions: Are short-run earnings estimates extrapolative and to what extent can these earnings estimates be approximated by familiar extrapolation techniques? His thesis is that expected future earnings are in part a function of prior earnings and that there is much to be learned by fitting a series of regressions or other forecasting models to historical data.

This paper presents a discrete stochastic programming model for commercial bank bond portfolio management. It differs from previous bond portfolio models in that it provides an optimization technique that explicitly takes into consideration the dynamic nature of the problem and that incorporates risk by treating future cash flows and interest rates as discrete random variables. The model's data requirements and its computational demands are sufficiently limited so that it can be implemented as a normative aid to bond portfolio management. In addition, it can be extended by the addition of other asset and liability categories to serve as a more general model for commercial bank asset and liability management.

Present models for selecting portfolios according to the mean-variance criteria do not account for the simultaneous effect of error in estimating means, variances, and covariances of security returns. This paper describes an experiment in which the impact of estimation error is so strong that the usefulness of present mean-variance approaches to portfolio selection is brought into question.

Considerable attention has been focused in the past two decades on the substitutability of the liabilities of private nonmonetary financial intermediaries for money, narrowly defined as the sum of currency and demand deposits adjusted. Discussion concerning this topic related to the United States, and most of the empirical work has been confined to that country. The essential folklore of that discussion crossed the border into Canada and is now even reflected in its textbooks on Canadian money and banking. However, very little empirical work has been done in Canada to examine this lore.

The advent of the computer has permitted financial theorists to collect and analyze large amounts of financial data. In the field of investments some of the most important work has focused on historical rates of return in investments in common stocks. The classical study in this area is the Fisher-Lorie study [8,9] in which intern al rates of return were calculated for every security listed on the New York Stock Exchange from 1926–1965. Other studies related to the area have been complicated by Herzog [10], Fisher [6,7], Latané and Young [11], Soldofsky and Biderman [12], and Evans [3,4].

A substantial amount of scholarly effort in recent years has been devoted to the determination of the relationship between banking structure and performance. In general, the results of these studies indicate that banking structure affects both the price and quantity of banking services, but, for practical policy purposes, the impact of banking structure is quite small. Yet, the results of these studies have been inconclusive and contradictory to a substantial degree.

The purpose of this study is to analyze the behavior of the cost of equity capital in the commercial banks by looking at whether there exists an optimal composition of the bank “fund structure” that would maximize bank earnings through the minimization of its cost of funds. The analysis should give an approximate cut-off point for testing such projects as “checking plus,” checkless payment systems, etc.

Each business firm has a large body of fundamental data that can be organized so that it can aid in graphically determining the firm's optimum profit. In this paper an attempt has been made to bring forth a method by which some choice of policy may be followed in order to select a particular profit curve. More precisely, a policy will be determined that leads to a given optimal profit curve. In this paper “optimal profit curve” will mean the profit curve that has been selected from a fixed set of possible profit curves. The purpose of the paper is to describe a method to determine the policy that will reduce the optimal curve. The method is based on a general form of the Riesz- Kakutani Representation Theorem, which states that a bounded linear operator from the space of continuous functions of one variable t where 0 ≤ t ≤ 1 to the space of continuous functions can be represented as an integral to a Gowurin measure.

Almost twenty years ago, Markowitz [4] first suggested that portfolio selection be regarded as a parametric quadratic programming problem. Risk is stated in terms of the predicted variance of portfolio return — a function that is quadratic in the decision variables (the proportions of the portfolio invested in various securities). All other functions (e.g., expected return) and constraints are assumed to be linear. The objective is to find the set of efficient feasible portfolios. A portfolio is feasible if it satisfies a set of relevant linear constraints; it is efficient if it provides (1) less variance than any other feasible portfolio with the same expected return and (2) more expected return than any other feasible portfolio with the same variance.

This note examines the positive implications of the Latané-Tuttle [5, 6] geometric mean portfolio selection criteria for the determination of stock prices. Recently, Mossin [9] and Lintner [10] have derived the market prices of equities under the respective assumptions that investors have quadratic and exponential utility functions. While it would be presumptuous to suggest that all investors are “long-run wealth” maximizers, this criterion has a certain amount of intuitive appeal. The geometric mean criterion is equivalent to the maximization of a Bernoulli or logarithmic utility function and displays the desirable characteristic of decreasing absolute (i.e., as the investor's wealth increases, he becomes less averse to risk). This contrasts with the exponential utility function which displays constant absolute risk aversion and the quadratic utility function which displays the undesirable characteristic of increasing absolute risk aversion. Another suggested desirable characteristic of the geometric mean criterion is that it emphasizes the avoidance of bankruptcy while maximizing the asymptotic rate of growth of wealth [4, 5] and maximizing the probability of exceeding a given wealth level within a fixed time [3]. This note analyzes the aggregate effect on stock prices of investors using the geometric mean portfolio selection criterion.

There has developed over the last several years a large and growing literature on the relationship between local bank market structure and performance. Two characteristics of this development are particularly notable. First, a carefully structured microeconomic model of the banking firm is rarely used as the starting point of the analysis. Secondly, the possibility that local market structure may have a differential impact on bank performance in different activities seems to have escaped systematic investigation. Specifically, it is a contention of this study that an empirical investigation of structure and performance in banking must be grounded in the explicit development of a microeconomic model of the banking firm.

This paper has explored a problem presented by introducing formal measures of risk into firm decision making. Risk measured in the firm's asset collection may not equal risk in the claims against the assets, with a resulting inequality of valuations in an a priori balance sheet. This nonadditivity problem does not occur if covariance with some external portfolio is used as the risk measure. Computer testing has suggested that the nonadditivity problem could occur in considerable magnitude if variance were used as a risk measure, and to a substantially lesser extent if standard deviation (or the coefficient of variation) were used. Nonadditivity problems in the measures were worse in rather high (but not ultra-high) debt-use ranges and did not exist at all as long as debt was used so moderately that no chance of default was foreseen. While no findings were stated on this point, intuition and some unreported work done by one of the authors both suggest that nonadditivity would also be a problem in mixed risk measures, in which both covariance with an external portfolio and a measure of dispersion in the firm's own portfolio are employed.

The problem considered in this paper is the optimal expansion or contraction of credit by a single bank in response to a change in its reserve account. Such a change is usually not of an exogenous nature when the entire operations of the bank are considered. Quite often, the change in the reserve position comes as a result of the bank's decision to engage in securities transactions, thereby changing its mix of reserves and securities without affecting the total asset position of the bank. We do not consider the overall portfolio selection problem faced by the bank; we assume that changes in the reserve account from such decisions are exogenous to our models.

This paper presents the results of a study which sought to determine whether the status of large member banks as owner-controlled or management-controlled has borne a significant relation to bank profit rates during recent years. The impetus for the study was provided by the view, encountered frequently in the literature, that management-controlled firms may place less emphasis on profit rate than owner-controlled firms, sacrificing it for performance goals regarded as more consistent with management interest. W. Baumo.1 [1, p. 4 and pp. 101–104], for example, has argued that management-controlled firms may sacrifice profit rate in order to achieve higher growth rate and reduced risk acceptance. R. Monsen and A. Downs [11] suggest that such firms may sacrifice both profit rate and growth rate for reduced risk acceptance. K. Cohen and S. Reid, in their study of bank merger activity during 1952–1961 [5], argue that bank managers, as compared to bank owners, place more emphasis on growth rate and less emphasis on profit-associated variables. Other possibilities present themselves. Management-controlled firms may sacrifice profit rate directly for management salaries, bonuses, and fringe benefits, including benefits associated with management prestige. The management-controlled firms may simply pursue efficiency less vigorously.

The Sharpe or diagonal portfolio model has been accepted by a large segment of both academic and practical researchers in portfolio theory. The model is tractable, requires a relatively small set of inputs, and is viewed by many to present “reasonable” assumptions regarding the workings of the security market.

The results of this study indicate that the individual common stocks in the Dow-Jones. Industrial Average were not consistent inflation hedges. Assuming an 8.2 percent normal required rate of return, none of the common stocks was a complete inflation hedge during all three recent inflationary periods tested. Even assuming a zero normal required rate of return á la traditional investment theory, only six (20 percent) of the thirty common stocks sampled were inflation hedges during all three inflationary periods.

To assure that the commercial banking industry's performance serves the “convenience and needs” of the public, bank supervisory authorities have been vested with broad powers to alter the competitive environment in bank markets. While several criteria have been used to evaluate the effects of entry, merger, branching, and other changes in the allocation of bank resources, the results have been largely inconclusive. Since the regulatory authorities have pursued somewhat conflicting objectives in seeking a “failure-proof” system that is also “efficient,” there may be no single criterion for evaluation of bank behavior that is wholly consistent with the behavior predicted by the neoclassical theory of the firm.

All the stock price models discussed in this paper are based on the assumption that the present value of a share of common stock is equal to the discounted value of all future expected dividends accruing to the stockholder:

where Po : current value of a share of common stock,

Dt: dividend expected to be received at end of period t,

k : investor's discount or time-value rate, and

t : time.

We have discussed some of the effects of rate regulation in the property and casualty insurance industry. One consequence of the regulatory environment is that an optimal capital structure may clearly exist in this industry. If the rate of return to the insureds is generally deficient, we would expect that property and casualty stock companies would have an incentive to lever themselves to the maximum extent permissible by selling insurance. The classic monopoly of the economic literature finances its lucrative investment opportunities in a competitive capital market. The stock insurance company invests in that market, but the relative distribution of the return earned there may be less than equitable due to the process and standards of rate regulation.