When will borrowers choose fixed rate mortgages and when will they prefer index-linked mortgages? Baesel and Biger (BB) [1] proposed a model that answers this question. According to the BB model, a borrower's preference depends on the difference in interest rates between the fixed and index-linked mortgages, and on the covariance between the borrower's labor income and the rate of inflation. The purpose of this note is to propose a more complete model of borrower preferences. The novelty of the model lies in the inclusion of the value of the house (net of mortgage obligation) in the terminal wealth of the borrower. This inclusion leads to differences between this model and the BB model in the identification of the cases where borrowers will prefer fixed or index-linked mortgages.

Protection of pensions is a most important subject. The date that the Employee Retirement Income Security Act (ERISA) was signed, September 2, 1974, is considered the second most important date in social legislation in the United States--second only to the enactment of Social Security.

Much of the empirical research on mutual funds has rather significant implications for mutual fund investors. Unfortunately, many mutual fund investors have probably never heard about these research results or their implications. They probably, however, have heard some rules-of-thumb or guidelines from their brokers or peers about how to select a particular fund. The purpose of this note is to identify the selection criteria investors seem to use in their buying and selling of mutual fund shares once they have selected an investment objective. That is, do investors select mutual funds based on what I will call “efficient market” criteria (whether or not they are familiar with this literature), or do they use other factors? The criterion I use to measure selection by mutual fund investors is the annual net sales ratio, which is gross sales less redemptions divided by total assets at the start of the year.

The purpose of this paper is to determine the correct procedure for discounting cash outflows in a capital market context. Beedles has stated flatly that “the risk adjusted discount (RADR) approach should not be applied to investment projects with negative benefits” ([1], p. 176). Lewellen also has recently examined the problem because he felt that there “is something at least vaguely disturbing about the associated write-down of the present value of cash outflows for risk” ([7], p. 1332). Lewellen, however, concluded that “the standard procedure used for inflows can therefore be transferred intact. The logic is symmetric because the sign of the flows is reversed.” In a comment on Lewellen, Celec and Pettway stated that they are “in substantial disagreement with Lewellen's development as well as with any implied generality of employing the standard RADR procedure in valuing cash outflow streams” ([3], P. 1061). This inappropriateness of the standard RADR approach to valuing cash outflows seems to have been accepted in the 1iterature. Kudla [6] recently claimed that it has been proved by the above authors and others that the normative rules in capital budgeting do not hold in evaluating cash outflows.

A key assumption behind the traditional capital asset pricing model (CAPM) is the joint normality of security returns. Recently, however, this assumption has been relaxed in at least two directions. First, the emergence of continuous-time models has shifted emphasis from discrete-time random variables to continuous-time diffusion processes, with log-normality (as opposed to normality) for security prices in the stationary case. Second, the recognition that the CAPM is difficult to test empirically has led to the development of an asset pricing theory based on an arbitrage argument in large markets and free of any distributional assumption.

The relationship between heterogeneous expectations on the part of investors with respect to a security's future return and asset prices is an area of increasing interest in finance. Theoretical examples include Miller [14], Williams [23], and Jarrow [8]. Empirical examples include Bart and Masse [1] and Peterson and Peterson [18]. Miller, Bart and Masse, and Peterson and Peterson address issues related to whether an increase in divergence of opinion will lead to an increase in an asset's price. Unfortunately, little is known of how different types of changes in investors' probability distributions of returns influence asset returns. An even more basic problem is that it is not clear what is meant in terms of investor probability distributions when it is said that divergence of opinion increases or decreases. The answer to this problem has important implications for understanding equilibrium price.