Page 413 - DECO401_MICROECONOMIC_THEORY_ENGLISH

Microeconomic Theory

Notes Suppose that the expected income of person is (Y ) OC then his utility is CC on pointed line B K which
1
1
1
1
gives him more utility (CC ) while buying lottery ticket which is more than DD utility of not buying
1 1
ticket. Thus, the person will buy lottery ticket with premium pay for fire protection of his house.
Now we suppose expected income OG from the upper part F K of TU curve when the marginal utility
1
1
is rising for income. In this condition, the utility of lottery ticket is GG which is more than DD if he
1
1
does not buy lottery ticket. So he will put his money in lottery ticket.
In the last stage when expected income of person is more than OK in K T region of TU curve, then the
1
1
marginal utility gets low and hence he does not get involved in any favorable odds like lottery tickets.
Self Assessment
Multiple choice questions:
4. Insurance Company do ......................... in risk.
(a) partnership (b) stake (c) buy (d) none of these
5. Every company gets ......................... of premium.
(a) two part (b) one part (c) three part (d) none of these
6. The big example of risk sharing is the Lioyd’s ......................... London.
(a) stake (b) market (c) insurance market (d) none of these
7. High risk people get insurance ........................ .
(a) more (b) less (c) lessen (d) none of these

29.3 Asset Portfolio Selection

An investment does not only think about the security of his asset but he also thinks to get more expected
income and lowers the risk too. This depends on the portfolio selection of asset which he has or he has
selected. A portfolio is a group of many stocks like share, bond, security, treasury bill etc. It can be stock
or can be business in market. These all assets are risk covered because the future result is unknown of
these. In other words, the result of these cannot get same as calculated. The real result can differ from
assumption. So the risk can say as loss or change. Thus the risk is related to variability or dispersion of
expected returns.
For an investor, the return from his asset like profit margin, interest, bonus is expected cash inflow.
The return can profit or loss in percentage in capital money. The current expected price of this return is
expected profit of stock person.

Mean Variance Analysis

The rate of portfolio of an investor is the average of rate of gaining individual investment. Weight is
percentage of total portfolio. The expected received rate for portfolio can be given like—
n
2
E = (α) ∑ W R
Ri i i
i–1
Where W = percentage of portfolio in asset i
i
R = expected rate of return in asset i
i
Table 1 shows the expected rate of 4 risk assets.
The expected rate of return for this portfolio of investment is 12 percented.
If the expected return rate has given, then a risk of investor can be measured by standard deviation or
variance of expected return. This is change of expected rate of return (R ) on farm of expected rate (ER )—
i i

406 LOVELY PROFESSIONAL UNIVERSITY