Book contents
- Frontmatter
- Contents
- Preface
- User Guide
- Introduction
- PART I THE THEORY OF CONSUMER BEHAVIOR
- 1.1 Budget Constraint
- 1.2 Satisfaction
- 1.3 Optimal Choice
- 1.4 Comparative Statics
- 1.5 Endowment Model
- 1.6 Bads
- 1.7 Search Theory
- 1.8 Behavioral Economics
- PART II THE THEORY OF THE FIRM
- PART III THE MARKET SYSTEM
- Conclusion
- Index
1.6 - Bads
from PART I - THE THEORY OF CONSUMER BEHAVIOR
Published online by Cambridge University Press: 05 June 2012
- Frontmatter
- Contents
- Preface
- User Guide
- Introduction
- PART I THE THEORY OF CONSUMER BEHAVIOR
- 1.1 Budget Constraint
- 1.2 Satisfaction
- 1.3 Optimal Choice
- 1.4 Comparative Statics
- 1.5 Endowment Model
- 1.6 Bads
- 1.7 Search Theory
- 1.8 Behavioral Economics
- PART II THE THEORY OF THE FIRM
- PART III THE MARKET SYSTEM
- Conclusion
- Index
Summary
One of the best-documented propositions in the field of finance is that, on average, investors have received higher rates of return for bearing greater risk.
Burton MalkielA portfolio is a briefcase, but it also means the total holdings of stocks, bonds, and other securities of an individual (or other entity, such as a trust or foundation).
Because the investor can decide which securities to hold in her portfolio, in other words, because choices are made, we can apply the method of economics.
An important stop on the road is shown in Figure 1.6.1.1. The indifference curves in Figure 1.6.1.1 are upward sloping because risk (on the x axis) is a bad (not a good).
Of course, Figure 1.6.1.1 is just the initial optimal solution. There is more to do than simply finding the initial solution. We want to explore how the optimal solution changes as one of the exogenous variables changes, ceteris paribus. This is called comparative statics analysis.
The strategy is clear: constraint, preferences, find initial solution, then comparative statics to make statements about how a shock variable affects an optimal choice variable. The short way of saying all of this is to just say that we are going to do an economic analysis of portfolio choice.
Optimal Portfolio Theory
Constraint
The Constraint, Compare, and Mix sheets demonstrate that an investor can mix two assets, a risk-free and a risky asset, to create a portfolio that has a particular combination of risk and return.
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- Information
- Intermediate Microeconomics with Microsoft Excel , pp. 195 - 228Publisher: Cambridge University PressPrint publication year: 2009