A Note on the Derivation of Linear Homogeneous Asset Demand Functions

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.