Financial Articulation of a Fiduciary Duty to Bondholders with ...

1986] FIDUCIARY DUTY TO BONDHOLDERS
D. EFFICIENT MARKET PORTFOLIOS
Risk (variance) has two components: diversifiable risk (which is
risk that can be eliminated by investment diversification) and covariance
risk (which is the nondiversifiable residual risk). 5 2 A "riskaverse"
investor eschews specified risk (the variance of outcomes in
an investment) in favor of its economically equivalent certainty (the
expected value of the investment), whereas a "risk-liking" investor
seeks such risk as against such certainty. A "risk-neutral" investor is
indifferent to such risk or to such certainty. 53
The intertemporal capital-asset-pricing model 54 can be developed
from the addition of three postulates to those of the Black-Scholes
option-pricing framework: 55 (1) all investors are risk-averse, 5 6 (2) all
investors have restricted mathematical forms of risk aversion and/or
all investments have restricted mathematical forms of returns 5 7 and
(3) all investors simultaneously possess identical investment facts and
5 8
beliefs. In the intertemporal capital-asset-pricing model, all investors
agree on the price of instantaneous covariance risk 5 9 and all in-
vestors own (in varying quantities) equal proportions of each
6 0
corporation's securities invested in.
"[O]ptimum portfolios for all investors" are combinations of a
52. See generally H. MARKOWITZ, PORTFOLIO SELECTION - (1959). "Covariance
risk" is the marginal change in portfolio risk caused by an asset.
53. E. FAMA & M. MILLER, supra note 9, at 200-03; Posner, The Rights of Creditors
of AJffiliated Corporations, 43 U. CHI. L. REv. 499, 502 nn.8-9 (1976). For a discussion
regarding risk-oriented states of mind, see K. ARROW, ESSAYS IN THE THEORY OF RISK-
BEARING 90-119 (1970); H. MARKOWITZ, supra note 52, at 205-73; Friedman & Savage,
The Utility Analysis of Choices Involving Risk, 56 J. POL. ECON. 279, - (1948) (expected
utility maximization with a concave-convex von Neumann-Morgenstern utility
function); and Pratt, Risk Aversion in the Small and in the Large, 32 ECONOMETRICA
122, - (1964).
54. The intertemporal capital-asset-pricing model is a special case of the arbitrage
theory of capital asset pricing. See Ross, The Arbitrage Theory of Capital Asset Pricing,
13 J. ECON. THEORY 341, - (1976). Its usefulness cannot be evaluated independently
of the capital market efficiency on which it is grounded. See Roll, A Critique of
the Asset Pricing Theory's Tests, 4 J. FIN. ECON. 129, - (1977). See generally Merton,
An Intertemporal Capital Asset Pricing Model, 41 ECONOMETRICA 867, - (1973).
55. See Galai & Masulis, supra note 27, at 54-55 & nn.4-6. See generally Hsia,
supra note 31, at - (integrating the option-pricing model with the capital-asset-pricing
model, the time-state preference model, and the Modigliani-Miller propositions).
56. Galai & Masulis, supra note 27, at 54.
57. See Cass & Stiglitz, The Structure of Investor Preferences and Asset Returns,
and Separability in Portfolio Allocation: A Contribution to the Pure Theory of Mutual
Funds, 2 J. ECON. THEORY 122 (1970); Ross, Mutual Fund Separation in Financial Theory
- The Separating Distributions, 17 J. ECON. THEORY 254, (1978).
58. Galai & Masulis, supra note 27, at 54. See generally Stiglitz, supra note 10, at
464 (stating: "It is the latter assumption that we find most objectionable.").
59. See Jensen, Capital Markets: Theory and Evidence, 3 BELL J. ECON. & MGMT.
Sci. 357, 362-63, 394-95 (1972).
60. E. FAMA & M. MILLER, supra note 9, at 289.