Financial Decision Making Under Uncertainty

1st Edition - September 28, 1977
Author: ANDERSON ANDERSON WEBSTER
Language: English
eBook ISBN:
9 7 8 - 1 - 4 8 3 2 - 9 4 9 9 - 5

Financial Decision Making under Uncertainty presents the increasing application of the approach to financial decision making under uncertain to a myriad of practical problems. This… Read more

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Financial Decision Making under Uncertainty presents the increasing application of the approach to financial decision making under uncertain to a myriad of practical problems. This book provides information pertinent to the fundamental aspects of financial theory. Organized into five parts encompassing 13 chapters, this book begins with an overview of formulating a problem as a linear program. This text then discusses the highlights of the theoretical and empirical analysis and then uses the same analytical framework to obtain results on the effect of inflation on the market price of risk. Other chapters consider meaningful utility functions for individual households that can be combined to construct an aggregate demand function for risky assets. This book discusses as well the formulation of the capital expenditure problems. The final chapter examines the case where the regulatory constraint is continuously enforced. This book is a valuable resource for advanced undergraduate and graduate students in financial theory.

List of Contributors

Preface

Part I Utility and Risk Analysis

An Algorithm for Finding Undominated Portfolios

I. Introduction

II. An Alternate Criterion for Dominance

III. The Algorithm

References

The Strong Case for the Generalized Logarithmic Utility Model as the Premier Model of Financial Markets

I. Introduction

II. The Generalized Logarithmic Utility Model

III. Financial Choice

IV. Financial Equilibrium

V. Financial Efficiency

References

Part II Investment Decisions Under Uncertainty

The Demand for Risky Assets: Some Extensions

I. Introduction and Summary

II. Determinants of Market Price of Risk: Theoretical Background

III. Determinants of Market Price of Risk: Statistical Tests

IV. Market Price of Risk and Inflation

References

Optimal Timing of Capital Expenditures

Introduction

I. Replacement Model

II. Simplification of the Model

III. Generality of the Replacement Model

IV. Numerical Illustrations

V. The General Model

VI. Concluding Observations

References

Leasing, Buying, and the Cost of Capital Services

I. Introduction

II. The Neoclassical Analysis for the Certainty Case

III. The Extension to Allow for Uncertainty

IV. The Impact of Taxes on the Rent-or-Buy Decision

V. The Impact of Tax Subsidies and Tax Exemptions

VI. Summary

References

Part III Portfolio Analysis and Capital Market Theory

The Capital Asset Pricing Model: A "Multi-Beta" Interpretation

I. Introduction

II. The Multi-Beta Interpretation

III. A Multifactor Model

IV. A Discrete-State Model

V. Expected Returns

VI. Historic Betas, Ex Ante Betas, and Actual Returns

VII. Measurement of Factors

References

Portfolio Efficiency Analysis in Three Moments: The Multiperiod Case

References

Equivalence among Alternative Portfolio Selection Criteria

I. Introduction

II. Mathematical Definitions and Comprehensive Theorem

III. Comments and Additional Results

References

Part IV Inflation and Financial Decisions

The Superfund: Efficient Paths Toward Efficient Capital Markets in Large and Small Countries

I. Introduction and Summary

II. Theoretical Foundations

III. Pragmatics: Some Basic Considerations

IV. Taking Cognizance of the Nitty Gritty of Investment Decision Making

V. Some Implications of S*

VI. Nominal Returns versus Deflated Returns

VII. Multiperiod Extensions

VIII. Concluding Remarks

References

Part V Applications of Risk Analysis

Default Risk and the Demand for Forward Exchange

I. Introduction

II. The Model and the Optimality Conditions

III. The Demand Schedules

IV. Equilibrium with Homogeneous Expectations

V. Summary and Concluding Remarks

References

Optimal Coupon Rate, Taxes, and Collusion Between Borrower and Lender

I. Assumptions

II. The Analysis Under Certainty

III. Collusion Under Uncertainty

IV. Summary and Concluding Remarks

References

An Optimal Screening Policy for R & D Projects

I. Introduction

II. The R & D Process

III. A Definition of Screening Performance

IV. The Model

V. Optimization with Fixed Budget

References

Optimal Investment and Financing Patterns Under Alternative Methods of Regulation

Introduction

I. The Basic Structure

II. Analysis When Regulation Is Continuously Enforced

III. Analysis with Regulatory Lag

IV. Conclusion

References

Author Index

Subject Index