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Reference As Behavior Towards Risk.” Review of Economic Studies 25 (2) (1958): 65-86 CHAPTER 1 Risk Uncorrelated with Returns 1. Eric N. Berg, “Market Place; A Study Shakes Confidence in the Volatile-Stock Theory,” New York Times, February 18, 1992. 2. Eugene Fama and Kenneth French, “The Cross-Section of Expected Stock Re­ turns, Journal of Finance 47 (2) (1992): 427—465. 3. Robert L. Heilbroner, The Worldly Philosophers: The Lives, Times, and Ideas of the Great Economic Thinkers (New York: Simon & Schuster, 1999). 4. Barry Nalebuff and Ian Ayres, Why Not?: How to Use Everyday Ingenuity to Solve Problems Big and Small (Boston: Harvard Business School Press, 2003); Steven Levitt and Stephen J. Dubner, Freakonomics: A Rogue Economist Ex­ plores the Hidden Side of Everything (New York: HarperCollins, 2006). 5. Peter L. Bernstein, Capital Ideas Evolving, 2nd ed. (Hoboken, NJ: John Wiley & Sons, 2007). 6. Marvin Minsky, The Emotion Machine: Commonsense Thinking, Artificial In­ telligence, and the Future of the Human Mind (New York: Simon & Schuster, 2007). CHAPTER 2 The Creation of the Standard Risk-Return Model 1. Peter L. Bernstein, Capital Ideas Evolving, 2nd ed. (Hoboken, NJ: John Wiley & Sons, 2007). 2. Peter L. Bernstein, Against the Gods: The Remarkable Story of Risk (New York: John Wiley & Sons, 1998), 1. 3. David Silverman, “The Case of Stock Splits: When One Plus One Equals More Than Two,” Smart Money, August 2, 2005. 4. The Miller-Modigliani Theorem states that the value of a firm is independent of the way it is financed, that is, the debt-equity proportion does not affect the sum value of the debt plus equity. 5. Frank H. Knight, Risk, Uncertainty and Profit (Boston: Houghton Mifflin, 1921), 213. 6. Knight, 224. 271 272 NOTES 7. Milton Friedman and Leonard J. Savage, “The Utility Analysis of Choices Involving Risk,” The Journal of Political Economy 56 (4) (1948): 279. 8. Ecclesiastes 11:2; William Shakespeare, in The Merchant of Venice, Act I, Scene I. 9. Harry M. Markowitz. Nobel Prize Speech (1990). 10. James Tobin, “Liquidity Preference as Behavior Towards Risk.” Review of Economic Studies 25 (2) (1958): 65-86. 11. Jack Treynor, “Toward a Theory of Market Value of Risky Assets.” Unpub­ lished Manuscript (1962); William Sharpe, “Capital Asset Prices: A Theory of Market Equilibrium under Conditions of Risk,” Journal of Finance 19 (3) (1964): 425-442; John Lintner, “The Valuation of Risk Assets and the Selec­ tion of Risky Investments in Stock Portfolios and Capital Budgets,” Review of Economics and Statistics 47 (1) (1965): 13-37; Jan Mossin, “Equilibrium in a Capital Asset Market,” Econometrica 34 (4) (1966): 768-783. 12. Stephen A. Ross, “The Arbitrage Pricing Theory of Capital Asset Pricing,” Journal of Economic Theory 13 (3) (1976): 341-360. 13. Eugene Fama, “Efficient Capital Markets,” Journal of Finance 46 (1991): 1575-1617. 14. Robert C. Merton, “Optimum Consumption and Portfolio Rules in a Continuous-Time Model,” Journal of Economic Theory 3 (4) (1971): 373-413; Robert Lucas, “Asset Prices in an Exchange Economy,” Econometrica 46 (6) (1978): 1429-1445; John C. Cox, Jonathan E. Ingersoll, and Stephen A. Ross, “An Intertemporal General Equilibrium Model of Asset Prices,” Econometrica 53 (2) (1985): 363-384. 15. Philip R.P. Coelho and James E. McClure, “The Market for Lemmas: Evidence that Complex Models Rarely Operate in Our World,” Econ Journal Watch 5 (1) (2008): 78-90. 16. Michael Harrison and David Kreps, “Martingales and Arbitrage in Multiperiod Securities Markets,” Journal of Economic Theory 20 (1979): 381—408. 17. E (ex) = e'*+°-s<’2 18. Benoit B. Mandelbrot, “The Variation of Certain Speculative Prices,” Journal of Business 36 (4) (1963): 394. 19. Benoit B. Mandelbrot, Fractals and Scaling in Finance: Discontinuity, Concen­ tration, Risk: Selecta Volume E (Berlin: Springer, 1997); Benoit B. Mandelbrot and Richard L. Hudson, The (Mis)Behavior of Markets: A Fractal View of Risk, Ruin, and Reward (New York: Basic Books, 2004). 20. Mark Rubinstein, A Flistory of the Theory of Investments: My Annotated Bib­ liography (Hoboken, NJ: John Wiley & Sons, 2006). 21. Hyman P. Minsky, John Maynard Keynes (New York: Columbia University Press, 1975). 22. John Maynard Keynes, The Collected Writings of John Maynard Keynes: Vol­ ume 8, A Treatise on Probability (Cambridge: Cambridge University Press, 1990). 23. John Maynard Keynes, “The General Theory of Employment,” The Quarterly Journal of Economics 14 (1937): 114-115. Notes 273 CHAPTER 3 An Empirical Arc 1. Peter L. Bernstein, Capital Ideas: The Improbable Origins of Modern Wall Street (New York: Free Press, 1992), 189. 2. William F. Sharpe, “Mutual Fund Performance,” Journal of Business 39(1) (1966): 119-138; Jack L. Treynor and Kay K. Mazuy, “Can Mutual Funds Out­ guess the Market?” Harvard Business Review 44 (4) (1966): 131-136; Michael C. Jensen, “The Performance of Mutual Funds in the Period 1945-1964,” Jour­ nal of Finance 23 (2) (1967): 389-A16. 3. George Douglas, “Risk in the Equity Markets: An Empirical Appraisal of Mar­ ket Efficiency,” Yale Economic Essays 9 (1) (1969): 3-45. 4. This unpublished work by John Lintner was noted by Douglas in his paper. 5. Merton H. Miller and Myron Scholes, “Rates of Return in Relation to Risk: A Re-examination of Some Recent Findings,” Studies in the Theory of Capital Markets (1972): 47-78. 6. The analysis of quirky events that allow one to isolate an effect is a theme of Freakonomics, as when they found that given the arbitrary age cutoffs for soccer players in Europe, those born in January did better than those in December, the key being that the hypothesis could not be examined without the arbitrary age cutoff in youth soccer leagues. 7. Fischer Black, Michael C. Jensen, and Myron Scholes, “The Capital Asset Pric­ ing Model: Some Empirical Tests,” Studies in the Theory of Capital Markets 81 (1972): 79-121; Eugene F. Fama and James D. MacBeth, “Risk, Return, and Equilibrium: Empirical Tests,” Journal of Political Economy 81 (3) (1973): 607. 8. Jay Shanken, “Multivariate Tests of the Zero-Beta CAPM,” Journal of Financial Economics 14 (3) (1985): 327-348; Michael R. Gibbons, “Multivariate Tests of Financial Models—A New Approach,” Journal of Financial Economics 10 (1) (1982): 3-27; Michael R. Gibbons, Stephen A. Ross, and Jay Shanken, “A Test of the Efficiency of a Given Portfolio,” Econometrica 57 (5) (1989): 1121-1152. 9. Richard Roll, “A Critique of the Asset Pricing Theory’s Tests: Part I: On Past and Potential Testability of the Theory,” Journal of Financial Economics 4 (2) (1977): 129-176. 10. Robert F. Stambaugh, “On the Exclusion of Assets from Tests of the 2- Parameter Model—A Sensitivity Analysis,” Journal of Financial Economics 10 (3) (1982): 237-268. 11. Jay Shanken, “Multivariate Proxies and Asset Pricing Relations: Living with the Roll Critique,” Journal of Financial Economics 18 (1) (1987): 91-110. 12. Richard Roll and Stephen A. Ross, “On the Cross-Sectional Relation Between Expected Returns and Betas,” Journal of Finance 49 (1) (1994): 101-121; Shmuel Kandel and Robert F. Stambaugh, “Portfolio Inefficiency and the Cross- Section of Expected Returns,” Journal of Finance 50 (1995): 185-224. 13. James Maxwell said, “The true logic of this world is in the calculus of probabili­ ties,” in Richard Phillips Feynman, The Feynman Lectures on Physics 1. Mainly Mechanics, Radiation, and Heat (Reading, MA: Addison-Wesley, 1970), while Frank Knight noted that “practically all decisions as to conduct in real life 274 NOTES rest upon opinions . easily resolve themselves into opinions of a probabil­ ity.” Frank H. Knight, Risk, Uncertainty and Profit (Boston: Houghton Mifflin, 1921), 237. 14. Rolf W. Banz, “The Relationship Between Return and Market Value of Com­ mon Stocks,” Journal of Financial Economics 9 (1) (1981): 3-18; Marc R. Reinganum, “Misspecification of Capital Asset Pricing: Empirical Anomalies Based on Earnings Yields and Market Values,” Journal of Financial Economics 9 (1) (1981): 19-46. 15. “Symposium on Size Effect,” Journal of Financial Economics 12 (1983). 16. Marshall E. Blume and Robert F. Stambaugh, “An Application to the Size Effect,” Journal of Financial Economics 12 (1983): 387—404. 17. Tyler Shumway, “The Delisting Bias in CRSP Data,” Journal of Finance 52 (1997): 327-340. 18. Peter J. Knez and Mark J. Ready, “On the Robustness of Size and Book- to-Market in Cross-Sectional Regressions,” Journal of Finance 52 (1997): 1355-1382. 19. S. Basu, “Investment Performance of Common Stocks in Relation to Their Price- Earnings Ratios: A Test of the Efficient Market Hypothesis,” Journal of Finance 32 (3) (1977): 663-682. 20. Laxmi C. Bhandari, “Debt/Equity Ratio and Expected Common Stock Returns: Empirical Evidence,” Journal of Finance 43 (2) (1988): 507-528. 21. Dennis Stattman, “Book Values and Stock Returns,” The Chicago MBA: A Journal of Selected Papers 4 (1980): 25-45. 22. G. William Schwert, “Size and Stock Returns, and Other Empirical Regulari­ ties,” Journal of Financial Economics, 12 (1983): 3-12. 23. Werner F.M. De Bondt and Richard H. Thaler, “Does the Stock Market Over­ react?” Journal of Finance 40 (3) (1985): 793-805; Werner F.M. De Bondt and Richard H. Thaler, “Further Evidence on Investor Overreaction and Stock Market Seasonality,” Journal of Finance 42 (1987): 557-581; Fischer Black, “Estimating Expected Return,” Financial Analysts Journal 49 (1995): 169. 24. Peter Bernstein, “Most Nobel Minds,” CFA Magazine, November-December 2005. 25. Barr Rosenberg, “Extra-Market Components of Covariance in Security Re­ turns,” Journal of Financial and Quantitative Analysis 9 (2) (1974): 263-273. 26. Nai Fu Chen, Richard Roll, and Stephen A. Ross, “Economic Forces and the Stock Market,” Journal of Business 59 (3) (1986): 383-403. 27. Christopher S. Jones, “Extracting Factors from Heteroskedastic Asset Returns,” Journal of Financial Economics 62 (2) (2001): 293-325.
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