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Unformatted text preview: Microeconomic Theory Econ 101A Fall 2008 GSI: Eva Vivalt Section Notes 12: CAPM 1 Asset Demand in General In order to think about the problem of the demand for financial assets in general, we first consider a consumer who gets utility through consumption only and lives for two periods. A risky asset is available in the first period at a price p t . The risky asset can then be sold in the second period at price p t +1 , which is a random variable. The consumer begins the first period with W t in initial wealth and must choose the quantity of the asset to purchase in order to maximize her total expected utility. This consumer’s objective function can be written as: max s u ( c t ) + δE t [ u ( c t +1 )] where 0 < δ < 1 is the consumer’s discount factor. The consumer faces two budget constraints – in the first period, she can either consume her wealth or invest in the asset and in the second period she can only consume as much as the asset pays off, thus the constraints are: c t = W t- p t s c t +1 = p t +1 s Her FOC w.r.t. the quantity of asset to buy is thus: ∂ ∂s ( u ( W t- p t s ) + δE t [ u ( p t +1 s )]) =- p t u ( W t- p t s ) +...
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This note was uploaded on 04/01/2009 for the course ECON 101a taught by Professor Staff during the Fall '08 term at Berkeley.
- Fall '08