Abstract: This paper considers a world in which pension funds may default, the cost of the associated risk of default is not borne fully by the sponsoring corporation, and there are differential tax effects. The focus is on ways in which the wealth of the shareholders of a corporation sponsoring a pension plan might be increased if the Internal Revenue Service (IRS) and the Pension Benefit Guaranty Corporation (PBGC) follow simple and naive policies. Under the conditions examined, the optimal policy for pension plan funding and asset allocation is shown to be extremal in a certain sense. This suggests that the IRS and the PBGC may wish to use more complex regulatory procedures than those considered in the paper.

Abstract: Security types security markets market indexes concepts investment concepts portfolio theory capital asset pricing model CAPM extensions derivative efficient market theory bond valuation bond trading equity valuation equity trading financial futures financial options international investments portfolio management asset allocation selection of active managers performance monitoring.

Abstract: This paper examines the relationship between U.S. corporations' management of their pension plans and their management of the more familiar aspects of corporate financial structure. The chief conclusion, on the basis of data for 7,828 pension plans sponsored by 1,836 companies and their subsidiaries, is that corporations do not manage the pension plans which they sponsor as if these plans had nothing to do with the corporation. Different responses appear to characterize firms' behavior in different contexts, but the evidence persistently indicates clear relationships between decisions about pension assets and liabilities and decisions about the other assets and liabilities of the firm. At the same time, the pattern of these relation- ships is, more often than not, inconsistent with familiar hypotheses that have emerged thus far in the theoretical literature analyzing pension aspects of corporate finance. Hence the conclusion from the data is also that the connections between pension decisions and corporate financial decisions in the more conventional sense are, at least as yet, not well understood.

Abstract: This paper addresses the issue of how an investor concerned about the real rate of return on his investment portfolio should allocate his funds among four major asset classes: stocks, bonds, bills and commodity futures contracts. It employs the Markowitz mean—variance framework to derive estimates of the pre—tax, real risk—return tradeoff curve currently facing an investor in the U.S. capital markets. Some of the major findings are: 1) Bills are the cornerstone of any low—risk investment strategy. The minimum—risk portfolio has a mean real rate of return of zero and a standard deviation of about 1%. The slope of the tradeoff curve is initially 1, but it declines rapidly as one progresses up the curve to higher mean rates of return. 2) Stocks offer the highest mean and are also riskiest. 3) Bonds play a prominent part in portfolios which lie in the midsection of the tradeoff curve, although not much would be lost if these instruments were eliminated. 4) Commodity futures contracts are the only asset whose returns are positively correlated with inflation. By adding them to the portfolios of stocks, bonds and bills, it is possible to achieve any target mean real rate of return with less risk. Zvi Bodie Boston University School of Management 704 Commonwealth Avenue Boston, Massachusetts 02215 (617) 353—4160

Abstract: This paper examines the relationship between U.S. corporations' management of their pension plans and their management of the more familiar aspects of corporate financial structure. The chief conclusion, on the basis of data for 7,828 pension plans sponsored by 1,836 companies and their subsidiaries, is that corporations do not manage the pension plans which they sponsor as if these plans had nothing to do with the corporation. Different responses appear to characterize firms' behavior in different contexts, but the evidence persistently indicates clear relationships between decisions about pension assets and liabilities and decisions about the other assets and liabilities of the firm. At the same time, the pattern of these relation- ships is, more often than not, inconsistent with familiar hypotheses that have emerged thus far in the theoretical literature analyzing pension aspects of corporate finance. Hence the conclusion from the data is also that the connections between pension decisions and corporate financial decisions in the more conventional sense are, at least as yet, not well understood.

Abstract: This volume contains contributions on a range of important issues in current research in finance and economics. Topics include the design of a country's financial safety nets, the effective policies of acquiring failed banks in reducing moral hazard problems, the voluntary disclosure of real options by corporate managers, and the interrelationship between the housing and general economic activities. Some important topics such as the choice between stock and options as compensation vehicles in the presence of bankruptcy risk, the NUA tax benefits in asset allocation in the retirement accounts, the heuristic approach of using ri/stdi to select securities in forming efficient portfolio, and the arbitrage opportunity in index options at the initial stage are also included in this volume. Finally, the contributions to this volume also address some problems that include the explanations of risk premiums on futures contracts, the optimal hedging decision in futures markets, and the pricing of Asian options subject to credit risk.

Abstract: This paper considers a world in which pension funds may default, the cost of the associated risk of default is not borne fully by the sponsoring corporation, and there are differential tax effects. The focus is on ways in which the wealth of the shareholders of a corporation sponsoring a pension plan might be increased if the Internal Revenue Service (IRS) and the Pension Benefit Guaranty Corporation (PBGC) follow simple and naive policies. Under the conditions examined, the optimal policy for pension plan funding and asset allocation is shown to be extremal in a certain sense. This suggests that the IRS and the PBGC may wish to use more complex regulatory procedures than those considered in the paper.

Abstract: 76 s M anagers of active investment portfolios 2 frequently attempt To forecast stock market returns in order to decide how to distribute their funds between stocks and fixed-dollar assets. Our purpose in this study is to develop a model that explains stock market returns and that makes fund allocations more efficient. The project has two phases. The first is to design a multiple regression model that might help to explain the annual rate of return of the stock ma,rket. The second is to determine whether a model that reflects this explanation could provide a portfolio strategy indicator that the manager can apply to making asset allocation decisions in an active portfolio. Before developing a new model and trading rules for determining asset allocations, however, we might ask how successfully managers have performed this task in the past. After all, pension fund administrators as a class have been busier than most institutional investors in varying their portfolio asset mix in equities over the years.’ Table I shows the percent of common stocks held in the portfolios of private non-insured pension funds in each of the past 25 years. Although several different factors can account for shifts in asset mix over time, such as changes in pension plan objectives and legal standards, Table I suggests several policy rules, particularly in conjunction with annual stock market returns as measured by the Standard & Poor’s Stock Index. One rule in evidence is a passive policy, which allows the percent of the portfolios in stocks to fluctuate with the stock market cycle. Observe that the z Fi