Chapter 5

Theory of Asset
Demand
Determining the
Quantity Demanded of an Asset
• Wealth—the total resources owned by the individual,
including all assets
• Expected Return—the return expected over the next
period on one asset relative to alternative assets
• Risk—the degree of uncertainty associated with the
return on one asset relative to alternative assets
• Liquidity—the ease and speed with which an asset
can be turned into cash relative to alternative assets

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Wealth
u Price Elasticity of Demand
u Price elasticity of demand is the percentage
change in quantity demanded given a
percent change in the price.

u It is a measure of how much the quantity

demanded of a good responds to a change
in the price of that good.
 Computing the Price Elasticity of
Demand
The price elasticity of demand is computed
as the percentage change in the quantity
demanded divided by the percentage
change in price.

Price Elasticity = Percentage Change in Qd

Of Demand Percentage Change in Price

Determinants of Price Elasticity of
Demand

• Demand tends to be more inelastic

 If the good is a necessity.
 If the time period is shorter.
 The smaller the number of close
substitutes.
 The more broadly defined the market.
 Determinants of
Price Elasticity of Demand
Demand tends to be more elastic :
u if the good is a luxury.
u the longer the time period.
u the larger the number of close
substitutes.
u the more narrowly defined the market.
Expected Return

• The expected Return of asset increase

relatively others → demand for this
increases.

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Risk

 Risk averse
 Risk neutral
 Risk loving

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 Diversification
• In finance, diversification means reducing risk by investing in
a variety of assets. If the asset values do not move up and
down in perfect synchrony, a diversified portfolio will have less
risk than the weighted average risk of its constituent assets,
and often less risk than the least risky of its constituent.
Therefore, any risk-averse investor will diversify to at least
some extent, with more risk-averse investors diversifying
more completely than less risk-averse investors.
• Diversification is one of two general techniques for reducing
investment risk. The other is hedging. Diversification relies on
the lack of a tight positive relationship among the assets'
returns, and works even when correlations are near zero or
somewhat positive. Hedging relies on negative correlation
among assets, or shorting assets with positive correlation.
Wikipedia
Risk

• Diversification
 Diversifiable risk / Specific risk:
 Non-diversifiable risk / Market risk

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Rủi ro
• VD: Lãi suất thị trường là 8%; trái phiếu A có
thể mang lại suất sinh lời như sau nếu nắm
giữ trong vòng 1 năm:
 15% nếu lãi suất năm tới giảm nhẹ, xác suất
giảm nhẹ là 30%
 18% nếu lãi suất năm tới giảm mạnh, xác suất
giảm mạnh là 20%
 3% nếu lãi suất năm tới tăng, xác suất là 50%
• Tín phiếu kho bạc thời hạn 1 năm với lợi suất
đáo hạn chắc chắn là 9,6%
• Tính suất sinh lời dự tính, rủi ro của trái phiếu
A và tín phiếu kho bạc
Liquidity

• The higher liquidity of asset is, the more

demand for it.

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Theory of Asset Demand

Holding all other factors constant:

1. The quantity demanded of an asset is positively
related to wealth
2. The quantity demanded of an asset is positively
related to its expected return relative to
alternative assets
3. The quantity demanded of an asset is negatively
related to the risk of its returns relative to
alternative assets
4. The quantity demanded of an asset is positively
related to its liquidity relative to alternative assets

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