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Sufficiency Conditions for Inclusion of One Asset over Another in Investment Portfolios

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  • Trainor, William J, Jr

Abstract

By extending Tsiang's (1972) analysis to encompass two risky assets, sufficiency conditions for including one asset over another in any investor's investment portfolio are derived. This derivation stems from the fact that any realistic utility function must have indifference curves with slopes less than one. Using this model's framework, it is found that short-term Treasury bills in addition to cash balances cannot be a component of investor's investment portfolios. The results have implications for both the risk-free rate used in portfolio analysis and provide a partial solution to Mehra and Prescott's (1985) equity premium puzzle. Copyright 1998 by MIT Press.

Suggested Citation

  • Trainor, William J, Jr, 1998. "Sufficiency Conditions for Inclusion of One Asset over Another in Investment Portfolios," The Financial Review, Eastern Finance Association, vol. 33(3), pages 169-182, August.
  • Handle: RePEc:bla:finrev:v:33:y:1998:i:3:p:169-82
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    Cited by:

    1. Cathleen Kantner, 2006. "What is a European Identity? The Emergence of a Shared Ethical Self-Understanding in the European Union," EUI-RSCAS Working Papers 28, European University Institute (EUI), Robert Schuman Centre of Advanced Studies (RSCAS).

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