MGT 200 Lecture Notes - Lecture 8: Risk Aversion, Perfect Competition, Risk Premium
Document Summary
Markets for securities are perfectly competitive and equally profitable to all investors. No investor is sufficiently wealthy that his or her actions alone can affect market prices. All information relevant to security analysis is publicly available at no cost. All securities are publicly owned and traded, and investors may trade all of them. Thus, all risky assets are in the investment universe. Thus, all investors realize identical returns from securities. Investors confront no transaction costs that inhibit their trading. Lending and borrowing at a common risk-free rate are unlimited: investors are alike in every way except for initial wealth and risk aversion; hence, they all choose investment portfolios in the same manner. Investors are efficient users of analytical methods, and by assumption 1. b they have access to all relevant information. Hence, they use the same inputs and consider identical portfolio opportunity sets. Investors choose to hold the market portfolio = mv of stock / total mv of all stocks.
