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Sufficiency Conditions For Inclusion of One Asset Over Another in Investment Portfolios
Author(s) -
Trainor William J.
Publication year - 1998
Publication title -
financial review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.621
H-Index - 47
eISSN - 1540-6288
pISSN - 0732-8516
DOI - 10.1111/j.1540-6288.1998.tb01389.x
Subject(s) - portfolio , economics , equity (law) , treasury , investment (military) , asset (computer security) , financial economics , capital asset pricing model , risk premium , equity premium puzzle , econometrics , cash , monetary economics , finance , computer security , archaeology , politics , political science , computer science , law , history
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.