ESSAYS ON TAXATION, PORTFOLIO POLICIES AND CAPITAL ASSET PRICING THEORY

This dissertation is a collection of four essays centered around the Capital Asset Pricing Theory, originally proposed by Sharpe {1964} and Lintner {1965}.;The second essay relates the concept of public goods derived from the proceeds of taxation to the Capital Asset Pricing Theory. Investors consume both private and public good and make optimal portfolio and consumption choices recognizing that the proceeds of taxation of portfolio income finances the public good. This added dimension results in an alternate tax effect specification in the resulting equilibrium asset pricing model.;The third essay evaluates the impact of corporate, ordinary personal and capital gains taxes on aggregate equilibrium investment in risky assets. The differential treatment of personal ordinary income taxes and capital gains taxes is a unique feature of this essay.;The fourth essay details the computation of common stock risk measures (based on the Capital Asset Pricing Theory) using ex-ante and ex-post data and tests for differences. Optimal portfolio fractions are computed under the hypothesis of the single index model first using ex-ante data and later using both ex-ante and ex-post data. This computation enables testing of the Capital Asset Pricing Theory by comparing the optimal portfolio fractions thus computed with those implied by the theory.;The first essay extends the Capital Asset Pricing Theory by simultaneously incorporating stochastic dividend yields and uncertain inflation under a progressive taxation of ordinary dividend income and deferral of capital gains taxation. A rigorous theoretical framework based on optimal portfolio and consumption choices by investors and subsequent aggregation of demand functions is deployed. The resulting tax effect specification is subjected to empirical tests.