Under the CAPM, all investors form portfolios of two assets, a risk-free asset and a risky portfolio M, regardless of their level of wealth Y. If an investor becomes wealthier, he may want to increase or decrease the proportion of his wealth held in the risky portfolio, and, by the Cass-Stiglitz Theorem, unless his preferences have a very specific form, as his wealth changes, he will want to alter the composition of the risky part of his portfolio. The CAPM does not assume such preference restrictions. Yet, the CAPM equilibrium does not seem to permit the desired changes in the composition of the agent's risky portfolio! Is there a contradiction?

Under the CAPM, all investors form portfolios of two assets, a risk-free asset and a risky portfolio M, regardless of their level of wealth Y. If an investor becomes wealthier, he may want to increase or decrease the proportion of his wealth held in the risky portfolio, and, by the Cass-Stiglitz Theorem, unless his preferences have a very specific form, as his wealth changes, he will want to alter the composition of the risky part of his portfolio. The CAPM does not assume such preference restrictions. Yet, the CAPM equilibrium does not seem to permit the desired changes in the composition of the agent's risky portfolio! Is there a contradiction?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter8: Analysis Of Risk And Return

Section: Chapter Questions

Problem 13QTD

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