Document Type

Thesis - Open Access

Award Date


Degree Name

Master of Science (MS)




An investor maintains a portfolio containing various quantities of such items as money, bonds, securities, or other physical goods which comprise his wealth. Assuming that the investor attempts to maximize his wealth subject to his preferences toward risk, then the investor must make a change in his portfolio to maintain equilibrium if there is a change in the condition affecting either risk, appreciation, rate of return or any of the assets in his portfolio. As a result, the rates of return of the various forms of wealth become very important, i.e., the expected rate of return on bonds vis-a-vis the expected rate of return on other securities. How then can the investor determine which course of action to take to regain equilibrium given a change in specific aggregate conditions? More specifically, what generalized conditions may be used to determine the buy and sell conditions for equity shares? In other recent. studies aggregate variables were regressed against a stock price index. In this study aggregate variables were regressed against an earnings-price index. The study presented in this paper was an exploratory analysis of the relationship between the earnings-price index and real gross national product, interest rates, and expectations of the real money supply and inflation. An adaptive expectations mechanism utilizing the Almon distributed lag technique was used to capture the effects of expectations. One of the problems associated with using the distributed lag technique was determining the number of time-periods to include in the lag structure. Since there was little a priori information available on the point of truncation, a number of regressions were fitted with alternative lag structures. In Chapter 2, a review and critique of previous studies of both equity share price models and interest rate theory is presented. The model is developed in Chapter 3. Chapter 4 contains a presentation of the empirical results. The conclusions of this study and recommendations for future studies are presented in Chapter 5.

Library of Congress Subject Headings




Business cycles



Number of Pages



South Dakota State University