ECON351-Chapter5

ECON351-Chapter5 - ECON 351 Chapter 5 The Theory of...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
1 ECON 351 Chapter 5 The Theory of Portfolio Allocation The theory of portfolio choice outlines the criteria that are important when deciding which assets are worth buying. Determinants of Asset Demand •An asset is a piece of property that has a store of value such as money, bonds, stocks, house… • Deciding on which assets will be bought, how much it will be bought, an individual must consider the following factors: – Wealth – Expected return –R isk – Liquidity – Costs of acquiring information Wealth Wealth is total resources owned by individuals. • As wealth increases, the quantity of assets we demand increases. Wealth elasticity of demand for an asset: percentage change in quantity demanded of the asset over percentage change in wealth. Luxury good: when wealth elasticity of demand is greater than 1. Necessity good: when wealth elasticity of
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
2 Expected Returns on Assets •An increase in an asset’s expected return relative to that of an alternative
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 03/17/2008 for the course ECON 351 taught by Professor Bayraktarnihal during the Spring '08 term at Penn State.

Page1 / 3

ECON351-Chapter5 - ECON 351 Chapter 5 The Theory of...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online