Financial Decision Making Under Uncertainty

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.

Table of Contents:
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