ABSTRACT
This chapter considers some important properties of asset demand equations that result from the maximization of expected utility. In most cases, it is assumed that expected utility is described by a function of the mean and variance of the argument of the utility function. The chapter examines some general results applicable to asset demand equations derived from mean-variance analysis. In the all-risky assets case, the implications of the Pratt-Arrow measures of risk aversion on the comparative statics properties of asset demands are, by definition, ambiguous in most instances. The chapter focuses on the derivations and general similarities of the several alternative specifications. The imposition of symmetry and adding-up constraints is important for the specification and estimation of asset demand relationships. For an investor’s entire set of demand equations, it is necessary that the column sums of this coefficient matrix equal zero.
