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A Note on the Derivation of Linear Homogeneous Asset Demand Functions

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Author Info
Benjamin M. Friedman
V. Vance Roley
Abstract

Among the numerous familiar sets of specific assumptions sufficient to derive mean-variance portfolio behavior from more general expected utility maximization in continuous time, the assumptions of constant relative risk aversion and joint normally distributed asset return assessments are also jointly sufficient to derive asset demand functions with the two desirable (and frequently simply assumed) properties of wealth homogeneity and linearity in expected returns. In addition, in discrete time constant relative risk aversion and joint normally distributed asset return assessments are sufficient to yield linear homogeneous asset demands as approximations if the time unit is small.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 0345.

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Date of creation: May 1979
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Handle: RePEc:nbr:nberwo:0345

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. James Tobin, 1956. "Liquidity Preference as Behavior Towards Risk," Cowles Foundation Discussion Papers 14, Cowles Foundation, Yale University. [Downloadable!]
  2. Cass, David & Stiglitz, Joseph E., 1970. "The structure of investor preferences and asset returns, and separability in portfolio allocation: A contribution to the pure theory of mutual funds," Journal of Economic Theory, Elsevier, vol. 2(2), pages 122-160, June. [Downloadable!] (restricted)
  3. Ross, Stephen A, 1975. "Uncertainty and the Heterogeneous Capital Good Model," Review of Economic Studies, Blackwell Publishing, vol. 42(1), pages 133-46, January. [Downloadable!] (restricted)
  4. Hakansson, Nils H, 1970. "Optimal Investment and Consumption Strategies Under Risk for a Class of Utility Functions," Econometrica, Econometric Society, vol. 38(5), pages 587-607, September. [Downloadable!] (restricted)
  5. Friend, Irwin & Blume, Marshall E, 1975. "The Demand for Risky Assets," American Economic Review, American Economic Association, vol. 65(5), pages 900-922, December. [Downloadable!] (restricted)
  6. William C. Brainard & James Tobin, 1968. "Pitfalls in Financial Model-Building," Cowles Foundation Discussion Papers 244, Cowles Foundation, Yale University. [Downloadable!]
  7. Tsiang, S C, 1972. "The Rationale of the Mean-Standard Deviation Analysis, Skewness Preference, and the Demand for Money," American Economic Review, American Economic Association, vol. 62(3), pages 354-71, June. [Downloadable!] (restricted)
  8. Merton, Robert C., 1971. "Optimum consumption and portfolio rules in a continuous-time model," Journal of Economic Theory, Elsevier, vol. 3(4), pages 373-413, December. [Downloadable!] (restricted)
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  9. Samuelson, Paul A, 1970. "The Fundamental Approximation Theorem of Portfolio Analysis in terms of Means, Variances, and Higher Moments," Review of Economic Studies, Blackwell Publishing, vol. 37(4), pages 537-42, October. [Downloadable!] (restricted)
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. V. Vance Roley, 1980. "A Disaggregated Structural Model of the Treasury Securities, Corporate Bond, and Equity Markets: Estimation and Simulation Results," NBER Technical Working Papers 0007, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  2. Jeffrey A. Frankel & William T. Dickens, 1986. "Are Asset Demand Functions Determined by CAPM?," NBER Working Papers 1113, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  3. David S. Jones & V. Vance Roley, 1981. "Bliss Points in Mean-Variance Portfolio Models," NBER Technical Working Papers 0019, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  4. V. Vance Roley, 1983. "Symmetry Restrictions in a System of Financial Asset Demands: A Theoretical and Empirical Analysis," NBER Working Papers 0593, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  5. Benjamin M. Friedman, 1983. "Federal Reserve Policy, Interest Rate Volatility, and the U.S. Capital Raising Mechanism," NBER Working Papers 0917, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  6. Benjamin M. Friedman, 1980. "Effects of Shifting Saving Patterns on Interest Rates and Economic Activity," NBER Working Papers 0587, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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