Abstracts - Financial Services Review

Abstracts:

Financial Services Review
Volume 3 Number 1, 1993/1994

Efficient Frontiers in Estate Planning
(pp. 1-27) DOWNLOAD FULL-TEXT ARTICLE
Ronald R. Crabb

ABSTRACT
This article explores the nature of the efficient frontier in probabilistic estate planning for 16 different estate plans by considering as random variables ages at death, rates of return on assets, and borrowing rates on debts. The simulation considers two couples, one middle aged, the other elderly. Two 16x16 matrices, one for each couple, are used to record and compare the results of every simulation. That comparative data, in conjunction with the coefficient of variations based efficient frontier, contain useful information for couples who consistent with their levels of risk, desire to maximize the net present value of assets passing to their heirs. The efficient frontier is shown to be a function of three factors: assumptions, ages of the estate owners, and the discount rates of the heirs. Because of the instability shown in the efficient frontier, estate planners and estate owners must carefully examine not only the estate plans which fall on the efficient frontier but also those estate plans which fall just off that frontier.

Market Timing for the Individual Investor: Using the Predictability of Long-Horizon Stock Returns to Enhance Portfolio Performance
(pp. 29-43) DOWNLOAD FULL-TEXT ARTICLE
Steven P. Rich, William Reichenstein

ABSTRACT
Recent research indicates that dividend yield and earnings-price ratio can partially predict long-horizon stock returns. We examine whether individual investors can successfully construct timing portfolios based on either of these variables or a measure of the expected market risk premium. The out-of-sample tests in this study require that investors rely only on information that was available at the time of the market-timing decision. Timing portfolios based on the market risk premium show the strongest ability to time the market. We present an economic rationale for the results that is consistent with efficient markets.

Real Income Growth and Optimal Credit Use
(pp. 45-58) DOWNLOAD FULL-TEXT ARTICLE
Jessie X. Fan, Y. Regina Chang, Sherman Hanna

ABSTRACT
Borrowing may be optimal if real income is expected to increase. If income growth is uncertain, optimal credit use is not obvious. A two period model of consumption for determining optimal credit use is presented. The impact of real income growth is analyzed with numerical analysis. The results may be useful for financial counselors and educators, as well as for insight into empirical patterns of credit use. The income growth rate expected by the household plays a crucial role in determining optimal credit use for current consumption.

The Individual's Tax-Exempt Bond Portfolio Decision Under Income Uncertainty
(pp. 59-73) DOWNLOAD FULL-TEXT ARTICLE
Amy V. Puelz

ABSTRACT
In this article, an individual's tax-exempt bond portfolio decision is investigated. A model capturing the relationship between income uncertainty and optimal portfolio choice is defined when all individual decision-maker has the opportunity to hold higher yielding private-activity bonds. The findings in this article show that in most cases risk-averse individuals will maximize the expected ability of after-tax income by holding a large proportion of private-activity bonds in their portfolio even under income uncertainty and the risk of a minimum tax liability. Those individuals who would benefit from holding private-activity bonds in a tax-exempt portfolio are identified and the magnitude of the benefit if quantified.

An Empirical Analysis of the Use of Money Orders, the Payment System of the Poor
(pp. 75-81) DOWNLOAD FULL-TEXT ARTICLE
Kenneth N. Daniels, Neil B. Murphy, Dennis M. O'Toole

ABSTRACT
Although money orders have been available in the United States since the Civil War, until the mid 1970's and the failure of United States Navigation Company and Universal Money Orders, there had been little analysis of the money order market. This study empirically investigates the determinants of money order usage by households. The results of the study, which utilizes two large national samples, indicate that money orders are clearly an inferior good which have a high probability of being purchased by a low income, young, ethnic minority.


THE JOURNAL OF INDIVIDUAL FINANCIAL MANAGEMENT
*Abstracts:* Financial Services Review Volume 3 Number 1, 1993/1994 Efficient Frontiers in Estate Planning (pp. 1-27) DOWNLOAD FULL-TEXT ARTICLE Ronald R. Crabb ABSTRACT This article explores the nature of the efficient frontier in probabilistic estate planning for 16 different estate plans by considering as random variables ages at death, rates of return on assets, and borrowing rates on debts. The simulation considers two couples, one middle aged, the other elderly. Two 16x16 matrices, one for each couple, are used to record and compare the results of every simulation. That comparative data, in conjunction with the coefficient of variations based efficient frontier, contain useful information for couples who consistent with their levels of risk, desire to maximize the net present value of assets passing to their heirs. The efficient frontier is shown to be a function of three factors: assumptions, ages of the estate owners, and the discount rates of the heirs. Because of the instability shown in the efficient frontier, estate planners and estate owners must carefully examine not only the estate plans which fall on the efficient frontier but also those estate plans which fall just off that frontier. Market Timing for the Individual Investor: Using the Predictability of Long-Horizon Stock Returns to Enhance Portfolio Performance (pp. 29-43) DOWNLOAD FULL-TEXT ARTICLE Steven P. Rich, William Reichenstein ABSTRACT Recent research indicates that dividend yield and earnings-price ratio can partially predict long-horizon stock returns. We examine whether individual investors can successfully construct timing portfolios based on either of these variables or a measure of the expected market risk premium. The out-of-sample tests in this study require that investors rely only on information that was available at the time of the market-timing decision. Timing portfolios based on the market risk premium show the strongest ability to time the market. We present an economic rationale for the results that is consistent with efficient markets. Real Income Growth and Optimal Credit Use (pp. 45-58) DOWNLOAD FULL-TEXT ARTICLE Jessie X. Fan, Y. Regina Chang, Sherman Hanna ABSTRACT Borrowing may be optimal if real income is expected to increase. If income growth is uncertain, optimal credit use is not obvious. A two period model of consumption for determining optimal credit use is presented. The impact of real income growth is analyzed with numerical analysis. The results may be useful for financial counselors and educators, as well as for insight into empirical patterns of credit use. The income growth rate expected by the household plays a crucial role in determining optimal credit use for current consumption. The Individual's Tax-Exempt Bond Portfolio Decision Under Income Uncertainty (pp. 59-73) DOWNLOAD FULL-TEXT ARTICLE Amy V. Puelz ABSTRACT In this article, an individual's tax-exempt bond portfolio decision is investigated. A model capturing the relationship between income uncertainty and optimal portfolio choice is defined when all individual decision-maker has the opportunity to hold higher yielding private-activity bonds. The findings in this article show that in most cases risk-averse individuals will maximize the expected ability of after-tax income by holding a large proportion of private-activity bonds in their portfolio even under income uncertainty and the risk of a minimum tax liability. Those individuals who would benefit from holding private-activity bonds in a tax-exempt portfolio are identified and the magnitude of the benefit if quantified. An Empirical Analysis of the Use of Money Orders, the Payment System of the Poor (pp. 75-81) DOWNLOAD FULL-TEXT ARTICLE Kenneth N. Daniels, Neil B. Murphy, Dennis M. O'Toole ABSTRACT Although money orders have been available in the United States since the Civil War, until the mid 1970's and the failure of United States Navigation Company and Universal Money Orders, there had been little analysis of the money order market. This study empirically investigates the determinants of money order usage by households. The results of the study, which utilizes two large national samples, indicate that money orders are clearly an inferior good which have a high probability of being purchased by a low income, young, ethnic minority.