A Note on the Derivation of Linear Homogeneous Asset Demand Functions

12 Pages Posted: 9 Jul 2000 Last revised: 14 Apr 2008

See all articles by Benjamin M. Friedman

Benjamin M. Friedman

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

V. Vance Roley

University of Hawaii - Shidler College of Business; National Bureau of Economic Research (NBER)

Date Written: May 1979

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.

Suggested Citation

Friedman, Benjamin M. and Roley, V. Vance, A Note on the Derivation of Linear Homogeneous Asset Demand Functions (May 1979). NBER Working Paper No. w0345. Available at SSRN: https://ssrn.com/abstract=227042

Benjamin M. Friedman (Contact Author)

Harvard University - Department of Economics ( email )

Littauer Center
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V. Vance Roley

University of Hawaii - Shidler College of Business ( email )

2404 Maile Way
Honolulu, HI 96822
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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