Question

according to the portfolio choice theory name and briefly explain four factors that affect the demand for particular asset.in detail​

Answer 1

Answer:

1. Wealth

As wealth increases, the demand for financial assets also increases.

There are two types of financial assets:

Necessity assets: For example, cash & checking accounts – demand grows slower.

Luxury assets: For example, stocks & bonds – demand grows faster.

2. Expected Return (RETe)

The Demand for Assets is relative to RETe (real, after tax expected return) on other assets. A Higher RETe results in an increase in demand for assets (and demand for other assets goes down).

3. Risk Relative to Other Assets

When the risk of an asset goes up, demand for one asset goes down, thus increasing demand for other assets.

4. Liquidity Relative to Other Assets

If liquidity goes up, then demand goes up for that asset, thus demand falls for the other assets.