THE RELATIONSHIP BETWEEN FINANCIAL PERFORMANCE AND STOCK MARKET BASED MEASURES OF CORPORATE DIVERSIFICATION

This study examines the relationship between corporate diversification and financial performance. The use of a stock market based measure of diversification allowed a much larger database than in previous studies and overcame the subjective nature of measuring internal diversification. Because previous researchers found that firm size affected performance, size was controlled in this analysis. The authors conclude that there is no statistically significant relationship between the degree of internal diversification and financial performance.     

EMPIRICAL ANALYSIS OF MUNICIPAL BOND PORTFOLIO STRUCTURE AND PERFORMANCE

The introduction of municipal bond mutual funds in 1976 as an alternative for investors increases the importance of examining the factors that may affect the performance of municipal bond portfolios. Some sponsors of unit trusts claim that diversification across states, tax districts, and purpose of issue improves performance. This study finds only slight support for this type of diversification, and the conclusion is that the prime determinants of price volatility are maturity and risk-premium.     

REGULATORY INFLUENCES ON PORTFOLIO PERFORMANCE: SHORT SELLING AND REGULATION T

Several models are developed to examine the portfolio effect of short selling. Three things are demonstrated in this study. First, that for many assets, short selling is a useful strategy for reducing risk when constructing mean-variance efficient portfolios. Second, Regulation T can be used in combination with short selling to further improve expected portfolio performance. Third, the performance of the suggested models is superior to previously suggested allocation models. Ex ante and ex post tests are conducted to arrive at the above conclusions.     

OPTIMAL PORTFOLIO DIVERSIFICATION AND THE EFFECTS OF DIFFERING INTRA SAMPLE MEASURES OF RETURN

It is shown that share returns series constructed from averaged data lead to biased estimates of the mean, variance and covariances of the underlying returns series. The computed variances and covariances will be only 2/3rds of their true values, whilst the mean will be reduced by 1/6th of the true variance. It is shown that this leads to distortions in the mean-variance efficient frontier and the implied investment proportions. A number of studies of international portfolio diversification have used averaged data and, therefore, an empirical study of IPD is reported which investigates the magnitude of the biases and the extent to which they can be corrected.     

MARGINAL CONDITIONAL STOCHASTIC DOMINANCE,STATISTICAL INFERENCE,AND MEASURING PORTFOLIO PERFORMANCE

A simple statistical test is developed for marginal conditional stochastic dominance (MCSD). The MCSD is an extension of second‐degree stochastic dominance. As such, without specification of the return‐generating process, it can rank securities according to marginal changes of return distributions conditionally to the distribution of the market proxy, thereby proving a powerful technique for measuring portfolio performance. Although the MCSD test is asymptotic and conservative, under both the hypotheses of homoskedasticity and heteroskedasticity, it has power to detect the dominance alternative for samples with more than 300 observations. For an illustration, the MCSD test is applied to international equity markets. The test is able to show that nine of twenty‐eight equity markets are dominated by the world market. JEL classification: G11, C49     

HEDGING PERFORMANCE AND HEDGING OBJECTIVES: TESTS OF NEW PERFORMANCE MEASURES IN THE FOREIGN CURRENCY MARKET

Two related approaches are introduced for measuring the performance of hedging strategies. The first summarizes the risk-return trade-off as a single annotated numerical value, and the second displays it as a performance curve. Two bounded sets of hedging strategies are used to evaluate empirically the performance measures. One set is divided according to whether it best satisfies short or long hedging objectives. Results show that market conditions often provide opportunities to reduce variance and increase expected return. They also suggest that the Commodity Futures Trading Commission's typical definition of “bona fide” hedging should be reconsidered.     

PORTFOLIO PERFORMANCE AND THE INTERACTION BETWEEN SYSTEMATIC RISK,FIRM SIZE AND PRICE-EARNINGS RATIO: THE CANADIAN EVIDENCE

While some American studies relate portfolio performance to P/E ratios, others reject such a hypothesis or find evidence of a confounded P/E-size effect. This prevents conclusive inferences. Canadian markets are structurally different from American ones; thus American evidence may not apply to Canadian stocks. This study examines how interaction between P/E ratio, beta and firm size affects the portfolio performance of Canadian stocks. The results show a relative support for the firm size effect, even after proper adjustment for risk and alternate change in control variables. This evidence is not uniform across different quarters of the year but not restricted to year-end effect. The findings also demonstrate a positive correlation among the three variables. However, one cannot generalize conclusions since the analysis may not capture all other pertinent factors.     

EX-ANTE EXPECTATIONS AND PORTFOLIO SELECTION

This paper examines differences among investors who are relatively optimistic/pessimistic regarding the performance of the stock market in terms of portfolio composition and trading activity. Findings indicate that investors more pessimistic regarding the stock market are likely to: (1) channel their funds into leveraged and tax advantageous investments, and (2) trade less frequently on the stock market.     

A COMPARISON OF RISK MEASURES WHEN USED IN A SIMPLE PORTFOLIO SELECTION HEURISTIC

Assuming that a portfolio manager selects a portfolio by maximizing the returnto-risk ratios of the securities that constitute the portfolio, the performance of this "heuristic" is sensitive to the choice of risk measure in the return-to-risk ratio. Using sixty month holding periods and second degree stochastic dominance to evaluate the performance of the portfolio selection heuristic; the mean absolute deviation, beta and target semivariance were found to be superior to the variance and the mean semivariance. In addition, the heuristic with the superior risk measures provided performance comparable to the optimal single index model.     

SOCIALLY RESPONSIBLE INVESTING AND PORTFOLIO DIVERSIFICATION

I use a sample of socially responsible stock mutual funds matched to randomly selected conventional funds of similar net assets to investigate differences in characteristics of assets held, portfolio diversification, and variable effects of diversification on investment performance. I find that socially responsible funds do not differ significantly from conventional funds in terms of any of these attributes. Moreover, the effect of diversification on investment performance is not different between the two groups. Both groups underperform the Domini 400 Social Index and S&P 500 during the study period.