Book ChapterDOI
THE DEMAND FOR RISKY ASSETS: Some Extensions
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In this paper, the same analytical framework is used to obtain new results on the effect of inflation on the market price of risk, and it turns out that by using nominal values for returns, the market prices of risk under inflation is increased by positive covariance between the rate of inflation and the market rate of return, and decreased by negative covariance.Abstract:
Publisher Summary This chapter discusses some extensions on the demand for risky assets. The research on capital asset pricing has until very recently been devoted almost exclusively to the interrelationships of the risk premiums among different risky assets rather than to the determinants of the market price of risk. Such research has also generally relied on theoretical preconceptions to determine the appropriate utility functions of individual investors upon which both the market price of risk and the pricing of individual risky assets depend. The chapter discusses the highlights of the theoretical and empirical analysis and their conclusions. Then, the same analytical framework is used to obtain new results on the effect of inflation on the market price of risk. It turns out that by using nominal values for returns, the market price of risk under inflation is increased by positive covariance between the rate of inflation and the market rate of return, and decreased by negative covariance. However, statistically as the actual covariance has been very small since the latter part of the 19th century, at least in the USA, the measured market price of risk is not affected appreciably by the adjustment for inflation.read more
Citations
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References
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An intertemporal capital asset pricing model
TL;DR: In this article, an intertemporal model for the capital market is deduced from portfolio selection behavior by an arbitrary number of investors who aot so as to maximize the expected utility of lifetime consumption and who can trade continuously in time.
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The Fundamental Approximation Theorem of Portfolio Analysis in terms of Means, Variances and Higher Moments
TL;DR: In this paper, the authors present an alternative way to relate the expected utility and mean-variance approaches, and present proofs of the usefulness of mean and variance in situations involving less and less risk.
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Individual investor risk aversion and investment portfolio composition
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The asset structure of individual portfolios and some implications for utility functions
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The Demand for Money: The Evidence from the Time Series
TL;DR: In a recent survey of monetary theory, this article showed that monetary theory as a part of capital theory is different from those who view monetary theory only as a problem in balance sheet equilibrium or asset choice.