Page 415 - DECO401_MICROECONOMIC_THEORY_ENGLISH

Microeconomic Theory

Notes 2. He estimates the risk of portfolio by changing in expected rate of returns.
3. He thinks all investment are is expectedly declared with investment options.
4. He maximizes a time for expected utility.
5. The utility curve of an investor shows the decreased marginal utility of money.
6. The decision of an investor for portfolio is based on expected returns and risks.

7. The utility curve of investor is result of standard variation of returns and variances of expected
returns.
8. In a given level of risk, an investor gives preference to higher returns rather than low.
9. He gives preference to lower risk than higher for getting a level of expected returns.

Self Assessment

State whether the following statements are True/False:
8. A portfolio is not a group of many stocks like share, bond, security, treasury bill etc.
9. The risk is related to variability or dispersion of expected returns.
10. Weight is the percentage of total portfolio.

The Model

On the given assumption, suppose that investment has many assets available on which he can invest.
There may be two combination of assets in portfolio. Every combination has a level of risk and expected
return. An investment chooses minimum risk or maximum risk portfolio. It depends as what he wants
to expect from his investment and how much he wants the risk. So in given two combination of assets
portfolio, investor selects the best portfolio. For selecting the best portfolio, investor has two decisions—
One, determination of efficient set of portfolio, and two, to select best or optimum portfolio from this
efficient set of portfolio.

Give your thought on gambling and insurance.

The Efficient Set and Efficient Frontier

The efficient set of portfolio of asset is good if it gives higher expected returns or minimum risk on this
higher expected return. In other words, a portfolio is efficient if another portfolio gives similar risk and
higher returns or higher returns on minimum risk. It is shown in Fig. 29.5 where a standard variation
(σ) of a portfolio of asset is shown on vertical axis which measures the risk and the expected returns of
portfolio (E ) is in horizontal axis. Whichever is with point region ENMF, efficient portfolio and this
R
region EF is called Efficient Frontier. A group of portfolio on which every risk level expected return
is higher or the risk of expected return is lower is called Efficient Set. The group efficient portfolio is
Efficient Portfolio. This is the only portfolio which a risk averse person will opt. Suppose that the level
of risks r , there are two portfolios K and M. From these, M is an efficient portfolio because for the given
2
level of risk r , the expected rate of return is r M is higher and it is on efficient region EF. Thus from N
2
2
and K portfolios, N is efficient portfolio because its risk r is lower while r risk of portfolio K is higher.
2
1
But the expected returns level of both are OR. So he would select N portfolio.
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