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1ECON 351Chapter 5The Theory of Portfolio Allocation•The theory of portfolio choiceoutlines the criteriathat are important when deciding which assets are worth buying.Determinants of Asset Demand• An assetis a piece of property that has a store of value such as money, bonds, stocks, house…•Deciding on which assetswill be bought, how muchit will be bought, an individual must consider the following factors:– Wealth– Expected return– Risk– Liquidity– Costs of acquiring informationWealth•Wealthis total resources owned by individuals.•As wealth increases, the quantity of assets we demand increases.•Wealth elasticity of demandfor 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 demand is less than 1.
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