The papers by Emery, “Risk, Return, and the Morphology of Commercial Banking,” and by Klein and Murphy, “The Pricing of Bank Deposits: A Theoretical and Empirical Analysis,” are impressive attempts to describe the rationale of banking behavior. They provide an interesting combination of contrast and similarity. Both derive a model of the individual bank—Emery credits Shull's descriptive model of multiple-product price discrimination, while Klein and Murphy assign no specific competitive category but provide rather a generalized mathematical construct. Emery then incorporates portfolio theory to determine the difference between the actual return on bank capital from an idealized rate. This difference, called rent, is posited as a measure of the extent to which the actual level of interbank competition differs from the ideal. Assuming that regulatory agencies aim to maximize competition and thus consumer welfare, the implication of positive or negative rent differentials is inefficient regulation.

Efficiency analysis is concerned with isolating the efficient subset of investments (portfolios) for all investors belonging to a specified group. In order to construct a meaningful efficiency criterion, i.e., one which holds for more than one investor, care must be exercised to ensure that the investors' efficient set is independent of their wealth.

This paper has discussed the importance of stationary data in statistical applications and has at the same time suggested one method for testing for stationarity. An application of the testing procedure is made to common stock prices. The results indicate that these data could be nonstationary in the usual sense of stability of the mean and mean-square values despite efforts to transform the data into a stationary form using first differences.

For some time there has been disagreement among financial economists as to the effect of dividend policy on the valuation of a firm under conditions of uncertainty. On one side of the debate Miller and Modigliani (MM) [11] argue that the capitalization rate on shares is independent of the dividend policy of the firm. Gordon [6], [7], [8], and others, on the other hand, reject this proposition and present theories of valuation where share prices and capitalization rates are very much dependent upon the dividend policies of firms.

Profeśsor Magen's paper, “Cost of Capital and Dividend Policies in Commercial Banks” is an attempt to measure and explain the effects of financial leverage on the cost of capital for commercial banks. The methodology used is that of linear multiple regression which is inappropriate with regard to his data.

The purpose of this note is to demonstrate that the explicit introduction of consumption patterns alters the traditional relationship between expected return and variance presented by Markowitz, Tobin, Sharpe, Lintner, and others.

George Kaufman and Cynthia Latta in “The Demand for Money: Preliminary Evidence from Industrial Countries,” have presented econometric evidence that the money-demand function may shift with the development of financial markets. The thesis depends on the heightened cross-elasticities and lowered wealth-elasticities (or income-elasticities) that are supposed to attend the development of new near-money forms. Their evidence is based on a summary of statistics from money-demand equations for developed and less-developed countries.

State universities are budgeted by their respective states based upon the number of students in attendance at each university. The university must often make a forecast of enrollment for budgetary purposes two years in advance because of various administrative and legislative procedures. When the university under-predicts enrollment, upon which state appropriations will be based, there will be a subsequent shortage of funds. On the other hand, an overprediction of enrollment entails the return of funds to the state unless the overprediction is within some limit prescribed by the state.

In a recent note in this journal, Professor Levy discussed the relative merits of the payback method and the discounted rate-of-return (IRR) method. In examining the relationship between K (IRR) and Kp (the reciprocal of the payback), he reaffirmed that the two were approximately equal based on the assumption that:

(1) annual earnings were the same every year, and

(2) ,

where N is the life of the asset.

In a recent paper by Lusztig and Schwab, a sensitivity analysis was performed on a linear programming capital budgeting problem where selection of projects is based on the criterion of present values. Their model is typical of current practice in the literature, and it is the point of this paper to indicate that a better model exists which allows more flexibility of assumptions and will yield the same results as a present value criterion. The model to be presented here uses a terminal value (horizon value) criterion for selection of the optimum set of investment projects.

Articles by Sharpe [1], Lintner [2], and Hastie [3] introduce concepts of systematic and unsystematic risk associated with portfolio rate of return. Defining risk as variation in portfolio return, such risk comprises two elements:

1. Systematic risk or variation, which is the covariation of portfolio rate of return with market rate of return.

2. Unsystematic risk or variation, which is the difference between total portfolio variation and systematic variation. Unsystematic variation is therefore variation due to attributes of individual securities.

In a paper published in an earlier issue of this journal, Melnik and Kraus [3] reported the results of their time-series analysis of the yields on U.S. government securities. The data used by the authors are somewhat unique in that the observations were derived from a regression-fitted yield curve, and in that the trend in mean was removed by employing deviations from a fitted trend line as the time series to be analyzed. The authors applied cross-spectral methods to their derived monthly time series for ninety-day Treasury bills and ten-year Treasury bonds, encompassing the years 1954–1967. Their interpretation of the results of their analysis led the authors to conclude that a cycle of eighteen to twenty-four months is significant and that the ten-year rate leads the short rate, thus apparently lending credence to the expectations hypothesis of the term structure of interest rates. A close examination of the basis for the Melnik and Kraus conclusions leads one to believe that they are questionable on the following two counts.

In the allocation of capital to investment projects, it is unlikely that optimal decisions will be reached unless anticipated inflation is embodied in the cash-flow estimates. Often, there is a tendency to assume that price levels remain unchanged throughout the life of the project. Frequently this assumption is imposed unknowingly; future cash flows are estimated simply on the basis of existing prices. However, a bias arises in that the cost-of-capital rate used as the acceptance criterion embodies an element attributable to anticipated inflation, while the cash-flow estimates do not. Although this bias may not be serious when there is modest inflation, it may become quite important in periods of high anticipated inflation. The purpose of this note is to investigate the nature of the bias and how it arises.

Some recent empirical studies have concluded that the common stock investor can virtually eliminate diversifiable risk with a portfolio that contains a “small” number of separate common stock issues [5, 6, 10, 11, 13]. The conclusion has several important implications. One of the inherent limitations of a portfolio manager is his inability to evaluate an infinite number of securities. The seriousness of this problem is directly related to the risks associated with a “small” portfolio. The economic function of a mutual fund industry is to provide diversification and professional management. If it is assured that a “small” portfolio can virtually eliminate diversifiable risk, the necessity of these functions may be questioned. In addition, the strategy of concentration may be less “risky” than is commonly supposed. Finally, the modern portfolio models generally assume that portfolio additions are costless.

In my article, I have discussed the relationship between the internal rate of return, K, and Kp which denotes the reciprocal of the payoff period under several alternative assumptions.

In an article published earlier in this journal [4], we studied the term structure of interest fates in a dynamic context. Instead of focusing on the yield curve at a point in time, we investigated the joint movement of short and long-term interest rates through time. We compared the cyclical behavior of the ninety-day Treasury bill rate and the ten-year U.S. government bond rate by using cross-spectral analysis. The data used for the analysis were obtained from regression-fitted yield curves. These fitted yield curves enabled us to obtain the monthly yields of securities of prespecified term to maturity. The derivation was done in a precise manner which at the same time is in line with most of the previous term structure studies.

Markowitz [12] and Tobin [19] pioneered in the development of a portfolio selection model resting on the assumptions that the investor

1. Chooses among alternative investment opportunities solely on the basis of expected return (E) and standard deviation of return 〈σ〉, and

2. Prefers more expected return to less but will refuse to incur additional risk (measured by standard deviation) unless compensated by increased expected return.