Abstract
A diversifed portfolio of equities thrives on good news. Its returns are especially high in realities where there is economic boom. Yet at times it has been fashionable to suggest that a market portfolio should be a hedge against inflation. Certain sectors of the equity market are reputed to possess further hedge properties; oil and Swiss bank equities are perceived as energy hedges, and armaments shares as war hedges. These claims can be assessed more fully once certain principles about the relationship of equity valuations to the total value of assets owned by the corporation are developed. This is the first topic of the present chapter.
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Notes and References
M. Modigliani, and M. Miller, ‘The Cost of Capital, Corporation Finance, and the Theory of Investment’, American Economic Review vol. 48 (June 1958) pp. 261–97. An important assumption is that individuals can lever their portfolios on the same terms as the corporation can lever itself. An investor buying an equity seeks to obtain a share in its portfolio of assets, including trading opportunities. If the corporation’s leverage ratio is different from the investor’s preferred one, he can correct for this by borrowing or lending on personal account.
See W. Sharpe, ‘Capital Asset Prices: A Theory of Market Equilibrium under Conditions of Risk’, Journal of Finance.,vol 19 (September 1964) pp. 425–42, for the original development of the two-parameter model.
See Bresciani-Turroni, Economics of Inflation (Kelley, 1968) p. 255.
See M. Friedman, The Optimum Quantity of Money (Macmillan, 1969 ), Chapter 1.
For evidence on this, see Vickers da Costa Ltd, United Kingdom Research 9 October, 1979.
For evidence of the low real rate of return on domestic francs, see R. Z. Aliber, ‘Attributes of National Monies and the Interdependence of National Monetary Policies’, in R. Z. Aliber (ed.), National Monetary Policies and the International Financial System (University of Chicago, 1974 ).
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© 1982 Brendan Brown
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Brown, B. (1982). Equities. In: A Theory of Hedge Investment. Palgrave Macmillan, London. https://doi.org/10.1007/978-1-349-06103-7_6
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DOI: https://doi.org/10.1007/978-1-349-06103-7_6
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