THE CANADIAN INVESTMENT OPPORTUNITY SET, 1967-1993

This paper characterizes the Canadian investment opportunity set (IOS) over the period from 1967 through 1993. The conditional IOS represent s the risk and return choices available to investors based on estimate d conditional means mid dispersions for equities, bills, bonds, aid re al estate. Our analysis reveals a number of insights regarding the evo lution of conditional asset moments in relation to important macro-fin ancial factors. We consider the impact of the term structure, the stre ngth of the Canadian dollar relative to rite U.S. dollar; rite January effect as well as other time series measure es in our specification f or conditional expected returns and risks. Our conditional mean specif ication finds strong sensitivities to economic factors as well as to t ime series factors iii the debt equations. A substantial January effec t is found only in conditional equity moments. Conditional risks displ ay strong time series properties as well as economic sensitivities to changes in short rates and to the short yield. After characterizing th e evolution of asset risks over time, we construct the conditional eff icient set constants that describe the conditional Canadian IOS hyperb ole. We find that the estimated IOS has a much larger maximum risk pri ce (slope) than is typically observed in unconditional estimates. The use of additional information reduces conditional portfolio risk subst antively. From a time series perspective, rite estimated slope is alwa ys positive, is positively serially correlated ann is significantly no nnormal (with substantial right skewness and leptokurtism). Ignoring o ther influences, we find a strong simple correlation between the riskl ess rare (IOS vertex) and the risk price (IOS slope); however our econ omic instruments display strong collinearity. We observe the following empirical regularities regarding IOS slope behaviour: a one time incr ease in short-term interest rates reduces the price of risk, an increa se in long term bond yields results in an increase in the required mar ket risk price, and the market price of risk increases substantially i n January.