Abstract

The view that a large institutional portfolio should contain both bonds and common stocks is almost universally accepted today, but the problem of determining optimal mix and timing for purchases of common stock and bonds is still unsolved. No mechanical solution to this problem can be developed, and we specifically reject any notion that rational decisions can be based on the hope of out guessing the market or predicting its future course or pattern. It is not suggested that the approach to this problem which is proposed in this article will permit a simple or mechanical solution to the problem. Its merit is its base on fundamental principles and its focus on the necessity for making the best possible estimates of the factors which will be most crucial to the success of the investment process. The goal is: to try to minimize the uncertainties and risks to which the investment process is inevitably exposed without giving up more in terms of expected yield than is appropriate, given the significance of uncertainty to the individual investor.