ABSTRACT
This chapter provides a theory of portfolio selection to seven of the ten categories of investors. The resultant framework is modified only slightly, however, in its application to the remaining investor groups. Several large scale studies would be necessary to successfully model all of the important aspects in each investor group. However, portfolio selection theory may be thought of as the microeconomic foundation for many of the specifications of asset demand equations found in the literature. The set of asset demand equations that result from the optimization problem can be constructed in a manner that is consistent with previous financial modeling approaches. The respective degrees of absolute and relative risk aversions have been shown to have implications for the comparative statics proper- ties of the asset demand equations when there is a riskless asset. Property deals with the boundedness of the utility function. The utility function must be bounded in order to discriminate among all possible probability distributions of outcomes.
