AN EXAMINATION OF THE YIELDS OF CORPORATE BONDS AND STOCKS - COMMENT AND REPLY

NORGAARD USES U.S. DATA FOR THE PERIOD 1926-1969 TO REJECT THE HYPOTHESIS THAT THE HIGHER MEAN YIELD OF STOCKS IS OFFSET BY THE LOWER VARIANCE OF YIELDS OF BONDS. HE CONCLUDES THAT NEITHER A BOND PORTFOLIO OR A MIXED PORTFOLIO IS APPROPRIATE FOR THE INSTITUTIONAL INVESTOR. MC CALLUM MAKES 2 POINTS REGARDING THE NORGAARD STUDY. FIRST, THE UNANTICIPATED UPWARD BOND YIELD MOVEMENT OVER THE SAMPLE PERIOD RESULTS IN A DOWNWARD BIAS IN THE MEAN. SECOND, THE BOND SAMPLE IS NOT REPRESENTATIVE OF INSTITUTIONAL BOND PURCHASING BEHAVIOR. UNANTICIPATED INTEREST RATE MOVEMENT AND HEDGING TENDENCIES ON THE PART OF INSTITUTIONS ARE FACTORS THAT SHOULD BE CONSIDERED. TABLE. REFERENCES.