Heterogeneity of Investors and Asset Pricing in a Risk-Value World



E (è) W0R

(6)


Varying R parametrically allows us to derive all risk-value efficient port-
folios. In the following the function

f (è) : =


∂F (è)
∂ è


(7)


will be of special importance. From the properties of the risk function
F{Ff < 0, Fzz > 0, and Fzzz < 0), we immediately get:f > 0, fz < 0, fzz > 0.

3.1 Risk-Value Models With an Endogenous Bench-
mark

Using this notation we can write the first order condition for a solution to the
minimization problem (4) - (6) with an endogenous benchmark
è = E(è), (η
is the Lagrange-multiplier of the budget constraint (5) and λ the Lagrange-
multiplier of the payoff constraint (6) ) as6 (after dividing by the probability
density)

-f (eε) + E[f (è)] = ηπε + λ; ε.                    (8)

As E(π) = 1, taking expectations yields

0 = η + λ                            (9)

6The solution of the minimization problem exists and is unique if a) for every e satisfying
the constraints (5) and (6) the value of the objective function is finite and b) for every
λ,η and e satisfying the first order condition (8) E[eτr] is finite [Back and Dybυig 1993].

13



More intriguing information

1. WP 1 - The first part-time economy in the world. Does it work?
2. The name is absent
3. HACCP AND MEAT AND POULTRY INSPECTION
4. The name is absent
5. The name is absent
6. Modelling Transport in an Interregional General Equilibrium Model with Externalities
7. The name is absent
8. POWER LAW SIGNATURE IN INDONESIAN LEGISLATIVE ELECTION 1999-2004
9. The name is absent
10. The name is absent