Investment Behaviour with Utility a Concave Function of Wealth

Marshall Freimer and Myron J. Gordon

Chapter Chapter 4 in Risk and Uncertainty, 1968, pp 94-119 from Palgrave Macmillan

Abstract: Abstract In its simplest terms this paper is concerned with the following problem. An individual is confronted with two assets: (1) a bond for which the payoff at time t + 1 per dollar invested at time t is certain and equal to or greater than one; and (2) a share of stock for which the payoff at t + 1 per dollar invested at t is a random variable with a known distribution and an expected value greater than the bond’s payoff. The individual’s wealth less his investment in the share is invested in the bond. Investment in the bond may be negative, that is, he may go in debt. How will the individual allocate his wealth between the two assets if his utility is a concave function of his wealth and his objective is the maximization of the expected value of his utility one period hence?

Keywords: Utility Function; Concave Function; Economic Decision; Investment Behaviour; Lottery Ticket (search for similar items in EconPapers)
Date: 1968
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DOI: 10.1007/978-1-349-15248-3_4

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