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-of- return is rx=xm+(1 -xr
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 +(1-x) x=0x= rf and x=1→rx=mn
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 (1-x)r x=0x= rf and x=1→rx=m Since stock is risky and risk is a bad, for stock to be purchased must have im >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 (1-x)r x=0x= rf and x=1→rx=m Since stock is risky and risk is a bad, for stock to be purchased must have nm >r So portfolio' s 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)