Budget Constraints for Risky Assets a bundle containing some of the risky stock and some of the risk-free asset is a portfolio. x is the fraction of wealth used to buy the risky stock. Given X, the portfolios av rate-of- return is x=xm+(1-x)rf
Budget Constraints for Risky Assets A bundle containing some of the risky stock and some of the risk-free asset is a portfolio. x is the fraction of wealth used to buy the risky stock. Given x, the portfolio’s av. rate-ofreturn is r xr x r x = m + − f (1 )
Budget Constraints for Risky assets rx=xrm+(1-x)r X=0x=f础x=1→rx=m
Budget Constraints for Risky Assets r xr x r x = m + − f (1 ) . x = 0 r r x = f and x = 1 r r x = m
Budget Constraints for Risky assets rx=xrm+(1-x)r X=0→x= rf and x=1→rx=m Since stock is risky and risk is a bad, for stock to be purchased must have rnm>r
Budget Constraints for Risky Assets r xr x r x = m + − f (1 ) . x = 0 r r x = f and x = 1 r r x = m. Since stock is risky and risk is a bad, for stock to be purchased must have rm r f
Budget Constraints for Risky assets rx=xrm+(1-x)r X=0→x= rf and x=1→rx=m Since stock is risky and risk is a bad, for stock to be purchased must have im >r So portfolios expected rate-of-return rises with x ( more stock in the portfolio)
Budget Constraints for Risky Assets r xr x r x = m + − f (1 ) . x = 0 r r x = f and x = 1 r r x = m. Since stock is risky and risk is a bad, for stock to be purchased must have rm r f . So portfolio’s expected rate-of-return rises with x (more stock in the portfolio)