TESTING THE PREDICTIVE POWER OF EX-POST EFFICIENT PORTFOLIOS

Tested here is the hypothesis that portfolios selected from among ex-post efficient assets will attain better results ex-ante than by following the naive strategy of holding an equally weighted portfolio of all the assets. The tests are conducted using the returns of the one hundred mutual funds that were continuously in operation from 1959 to 1980. Ex-post efficient funds are identified using nine investment decision rules (Stochastic Dominance and Mean-Variance rules with and without riskless asset and the Geometric Mean rule). Ex-ante performance is assessed in terms of terminal wealth and expected utility. Results indicate that over the twenty-two years tested, significantly better performance could be attained ex-ante by investing in mutual funds selected by ex-post efficiency analysis using the distribution-free Second- and Third-Degree Stochastic Dominance tests with Riskless Asset as well as by the more traditional Mean-Variance test with Riskless Asset. Excess returns from using ex-post information exceed the substantial transaction costs incorporated in the analysis.     

Multivariate decision-making

Consider a set of multivariate risky options. A partial ordering of these options is quite difficult, and even for the two-dimensional case a knowledge of the cross derivatives of the decision-maker's utility function is required. In this paper we establish first-degree multivariate stochastic dominance by applying the concepts of the indirect utility function and the indirect probability distribution. Thus, we reduce the complex multivariate risky option into a univariate risky option where the random variable is the derived indirect income. The second-degree stochastic dominance rule is also derived under certain restrictions on the utility function.     

Nonlinear mean reversion in stock prices

This paper provides new evidence on the time-series predictability of stock market returns by introducing a test of nonlinear mean reversion. The performance of extreme daily returns is evaluated in terms of their power to predict short- and long-horizon returns on various stock market indices and size portfolios. The paper shows that the speed of mean reversion is significantly higher during the large falls of the market. The parameter estimates indicate a negative and significant relation between the monthly portfolio returns and the extreme daily returns observed over the past one to eight months. Specifically, in a quarter in which the minimum daily return is −2% the expected excess return is 37 basis points higher than in a month in which the minimum return is only −1%. This result holds for the value-weighted and equal-weighted stock market indices and for each of the size decile portfolios. The findings are also robust to different sample periods, different indices, and investment horizons.     

A model-independent measure of aggregate idiosyncratic risk

This paper introduces a model-independent measure of aggregate idiosyncratic risk, which does not require estimation of market betas or correlations and is based on the concept of gain from portfolio diversification. The statistical results and graphical analyses provide strong evidence that there are significant level and trend differences between the average idiosyncratic volatility measures of Campbell et al. [Campbell, J.Y., Lettau, M., Malkiel, B.G., and Xu, Y., 2001, Have individual stocks become more volatile? An empirical exploration of idiosyncratic risk, Journal of Finance 56, 1–43.] and the new methodology. Although both approaches indicate a noticeable increase in the firm-level idiosyncratic risk, the volatility measure of CLMX is greater and has a stronger upward trend than the new idiosyncratic volatility measure. For both measures of idiosyncratic risk, the upward trend is found to be stronger for smaller, lower-priced, and younger firms. The analytical and empirical results show that the significant upward trend in the differences of the two idiosyncratic volatility measures is related to the increase in the cross-sectional dispersion of the volatility of individual stocks.     

COST EFFECTIVENESS— The Economic Evaluation of Engineered Systems Edited by J. Morley English John Wiley and Sons,Inc.

In this case study four actual energy efficiency projects are analyzed with two traditional engineering economy capital budgeting methods - internal rate of return and payback period - and the results compared with those obtained using the capital asset pricing model (CAPM). The alternative scenarios of the future states-of-the-world necessary for the latter are based on information available in Department of Energy reports. The traditional and CAPM approaches result in different economic conclusions for some of the projects. These differences are analyzed and the implications for certain types of improvement projects and equipment replacement problems as well as financial decision-making in general are discussed.     

Innovation,Skilled Labour,Technology And Performance In Israeli Industrial Firms

A technology index based on R&D, skilled labour and capital vintage was developed and used to characterise industrial firms by technology level, facilitating the analysis of relationships between technology and economic performance at the firm level. The results show that technology-intensive firms are important players in industrial performance, accounting for a disproportionate share of total production. Compared to other kinds of firms, technology intensive firms are larger, more productive, offer higher average salaries, generate a higher value added and a highcr profit per employee and capital. They also tend to operate in more highly concentrated industries and are more involved in external trade. While down-sized as a group, high-tech firms show net job creation during the 11-year period surveyed.