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ECON 2508 -

week 6 tutorial

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1 . We have We have Run =L Ran

①
" " "" "" "
I
" " " "" " " ""
"

( Rt .lt Rin R + Ran Asset 2 return : ( R2 L Rzie )

#
, .
.

|
Rem )
/
⇐,
Asset 1 return : ✗ ( Rai ,

Asset 2 return : ( R2 L Ran )

-1
( Rnr Rsn )
.
.

, , ,, , , ,
p , ,n ,
•
Since asset 1 return is
just a scalar return of asset 2
→ L or vice versa therefore , the return vectors at the two assets
,

reach points ( or opposite direction ) of one of the vectors

I can
only
Assume find the
•
we know ✗ . we can
optimal
combination of asset 1 and asset 2
to maximize the return of the portfolio .

Relating model of
to the consumption under risk with state antigens claims
•
-

investors can work out the constraints to find the maximum return in both

2 .
We have : Let b .bz be sneakers
,

of asset 1 and asset 2

Asset 1
.

{
return : ( Rw , Rsn ) = 11,01 And b. . bit IR

Asset 2 return : ( Rai ,

Ran ) = 10 1) , Since the combination
of asset returns vectors

of two assets is :
Run
b. ( Rin Ri.nl ,
+ be / Rin ,R , ,n
)
Kiri )

,,÷"(
= bill 01 ,
+
bz ( 0,1 )
.

( Rai Ran ) ,

( 0 1) n

lb 01 10 bz )
,

"" " =
, ,
+ ,

= lb . .ba )
z
,

µ .

( Rin Rin
,
)
 •
Since we have lb , ,
b, ) as the returns of asset 1 and asset 2 .
But
we also know that b ,
and by are
just some scalars .
Therefore ,

the of combinations reach the lR↳Rn )

any point
sums asset con in

plane .

• This means that based on their needs .

the investors con decide how

many
assets 1 and assets 2 to buy to reach their target return .

Relating to the model of consumption under risk with state -

antigens
claims ,
we observe that ones con transfer wealth across state of
nature

3 .
We have :
We have :

Asset 1 return ( 2. Rae x.Rz.nl

{
Ri Ran

}
,
n = x .
:
,

Ri . L = 2- R2 , L Asset 2 return : ( Rai ,

Run )

^
Ru 9 ( z -

Ri ,
+ Rz , x -

Run 1- Ran )
,
,
,

( Rai )
.

Rim We have the sums of assets return

vector of the two assets :

, ,,
.
µ,
)
,

( Rhi Rim ) ,
+ ( Rw Run .

¥
= ( 2 R2
.

, L ,
K .

R2 , H
) 1 ( R2 L ,
,
R2 , n
)

• Since neither of the vectors lies ( Ran )

on
= z -

Ry , ,
+ Rz , , ,
x -

Run 1-
the axes ,
therefore ,
R ' 't 1=0 '
R " t =/ ° '

Ri , n 1=0 . Ran 1=0 •

= [ (2+1) Ru ,
txt 1) Ran ]
I
•
As a result the sums of assets return vector of the two assets can reach
.

any
the ( Ri Rn ) plane
point in -

4.
•
The 2nd and 3rd cases are examples of complete asset return structures .

• The 1st case is example of incomplete asset return structure .