Abstracts - Financial Services Review

Abstracts:

Financial Services Review
Volume 1 Number 2, 1991/1992

Personal Financial Planning and the Allocation of Disposable Wealth
(pp. 87-99) DOWNLOAD FULL-TEXT ARTICLE
Amy V. Puelz, Robert Puelz

ABSTRACT
In the process of personal financial planning individuals are confronted with a time dependent wealth allocation problem. Oftentimes the solution involves selecting financial products based on objective criteria, for example, product cost and expected return. While objective criteria are important to the selection process, an individual's subjective valuation of all criteria, objective and subjective, relevant to the decision plays the crucial role. A goal programming model parameterized by the analytical hierarchy process is presented to determine the allocation of an individual's disposable wealth to present and future consumption bundles and investable assets, conditional on the preference ordering of the individual.

Should Individual Investors Avoid the Stock Market Outside of January?
(pp. 101-108) DOWNLOAD FULL-TEXT ARTICLE
Steven V. Mann, Donald P. Solberg

ABSTRACT
Recent studies suggest that there is no reward for bearing risk outside of January, implying that individuals should invest in common stocks only in January. The purpose of this study is to demonstrate that this conclusion is far too strong given existing empirical evidence. Our results suggest that inferences drawn from the evidence can be altered greatly through small changes in the way the empirical question is addressed. There is sufficient evidence to doubt the conclusion that individuals are not compensated for the risk of participating in the stock market outside of January.

Effective Credit Costs in Retail Financial Markets: Leasing Versus Borrowing
(pp. 109-129) DOWNLOAD FULL-TEXT ARTICLE
D. Anthony Plath, Bennie H. Nunnally, Jr.

ABSTRACT
This study examines reported credit cost information in the automobile sales market to determine if vehicle leasing really is cheaper than installment borrowing. In addition, the study evaluates the accuracy of credit cost data furnished to consumers by commercial banks, vehicle leasing firms, and automobile dealers to gauge whether any systematic differences exist in the accuracy of reported credit cost information. Results of the study suggest that the cost of leasing is significantly different from borrowing, yet neither financing alternative is unilaterally cheaper than the other. In addition, suppliers of credit in consumer finance markets routinely and significantly understate effective credit costs reported to consumers.

Comparing Mortgages with Different Payment Frequencies
(pp. 131-142) DOWNLOAD FULL-TEXT ARTICLE
Arefaine G. Yohannes

ABSTRACT
The biweekly-payment mortgage is an alternative to the monthly-payment mortgage. In this study, logistic regression is used to determine the influence of demographic characteristics on the choice between these two types of mortgages. Of the six independent variables that were considered, only two had significant influence on mortgage choice. They were the frequency of paydays and education.

Probabilistic Estate Planning
(pp. 143-157) DOWNLOAD FULL-TEXT ARTICLE
Ronald R. Crabb

ABSTRACT
Probabilistic estate planning is based on the principle of maximizing expected net present value commensurate with the risk assumed. Rather than assuming that death occurs at life expectancy, probabilistic estate planning treats death as a random variable. Compounded to randomly chosen ages of death, estate assets are taxed and distributed to heirs. The purpose of probabilistic estate planning is to find the estate plan and asset/liability combination that maximizes the expected net present value of assets passing to heirs and to convey some idea of the risk associated with that estate plan.

International Diversification for the Individual: A Review
(pp. 159-175) DOWNLOAD FULL-TEXT ARTICLE
Jeff Madura, Thomas J. O'Brien

ABSTRACT
This paper reviews aspects of literature on international investing that should be of interest to individual investors. Three modern issues are covered: (1) the benefits of international diversification as the global markets continue to integrate; (2) the problem of currency exposure; and (3) effective means of achieving international diversification. Strategies are discussed which enable the individual to apply suggestion from the research. By restricting the scope of the review to issues of most interest to the individual, we do not review research on international asset pricing theory and international market efficiency and "anomalies."


THE JOURNAL OF INDIVIDUAL FINANCIAL MANAGEMENT
*Abstracts:* Financial Services Review Volume 1 Number 2, 1991/1992 Personal Financial Planning and the Allocation of Disposable Wealth (pp. 87-99) DOWNLOAD FULL-TEXT ARTICLE Amy V. Puelz, Robert Puelz ABSTRACT In the process of personal financial planning individuals are confronted with a time dependent wealth allocation problem. Oftentimes the solution involves selecting financial products based on objective criteria, for example, product cost and expected return. While objective criteria are important to the selection process, an individual's subjective valuation of all criteria, objective and subjective, relevant to the decision plays the crucial role. A goal programming model parameterized by the analytical hierarchy process is presented to determine the allocation of an individual's disposable wealth to present and future consumption bundles and investable assets, conditional on the preference ordering of the individual. Should Individual Investors Avoid the Stock Market Outside of January? (pp. 101-108) DOWNLOAD FULL-TEXT ARTICLE Steven V. Mann, Donald P. Solberg ABSTRACT Recent studies suggest that there is no reward for bearing risk outside of January, implying that individuals should invest in common stocks only in January. The purpose of this study is to demonstrate that this conclusion is far too strong given existing empirical evidence. Our results suggest that inferences drawn from the evidence can be altered greatly through small changes in the way the empirical question is addressed. There is sufficient evidence to doubt the conclusion that individuals are not compensated for the risk of participating in the stock market outside of January. Effective Credit Costs in Retail Financial Markets: Leasing Versus Borrowing (pp. 109-129) DOWNLOAD FULL-TEXT ARTICLE D. Anthony Plath, Bennie H. Nunnally, Jr. ABSTRACT This study examines reported credit cost information in the automobile sales market to determine if vehicle leasing really is cheaper than installment borrowing. In addition, the study evaluates the accuracy of credit cost data furnished to consumers by commercial banks, vehicle leasing firms, and automobile dealers to gauge whether any systematic differences exist in the accuracy of reported credit cost information. Results of the study suggest that the cost of leasing is significantly different from borrowing, yet neither financing alternative is unilaterally cheaper than the other. In addition, suppliers of credit in consumer finance markets routinely and significantly understate effective credit costs reported to consumers. Comparing Mortgages with Different Payment Frequencies (pp. 131-142) DOWNLOAD FULL-TEXT ARTICLE Arefaine G. Yohannes ABSTRACT The biweekly-payment mortgage is an alternative to the monthly-payment mortgage. In this study, logistic regression is used to determine the influence of demographic characteristics on the choice between these two types of mortgages. Of the six independent variables that were considered, only two had significant influence on mortgage choice. They were the frequency of paydays and education. Probabilistic Estate Planning (pp. 143-157) DOWNLOAD FULL-TEXT ARTICLE Ronald R. Crabb ABSTRACT Probabilistic estate planning is based on the principle of maximizing expected net present value commensurate with the risk assumed. Rather than assuming that death occurs at life expectancy, probabilistic estate planning treats death as a random variable. Compounded to randomly chosen ages of death, estate assets are taxed and distributed to heirs. The purpose of probabilistic estate planning is to find the estate plan and asset/liability combination that maximizes the expected net present value of assets passing to heirs and to convey some idea of the risk associated with that estate plan. International Diversification for the Individual: A Review (pp. 159-175) DOWNLOAD FULL-TEXT ARTICLE Jeff Madura, Thomas J. O'Brien ABSTRACT This paper reviews aspects of literature on international investing that should be of interest to individual investors. Three modern issues are covered: (1) the benefits of international diversification as the global markets continue to integrate; (2) the problem of currency exposure; and (3) effective means of achieving international diversification. Strategies are discussed which enable the individual to apply suggestion from the research. By restricting the scope of the review to issues of most interest to the individual, we do not review research on international asset pricing theory and international market efficiency and "anomalies."