Question

1. Describe determinants of asset demand

Answer 1

1.Wealth- If everything else remains constant, an increase in wealth increases the amount of an asset required. Holding everything else constantly reduces the amount of wealth required of an asset
2. Expected Return- An increase in the expected return of an asset compared to that of an alternative asset, leaving all else constant, increases the amount of the asset offered. A reduction in the expected return of an asset relative to that of an alternative asset, leaving everything else unchanged, reduces the amount of the asset needed
3. Risk- Person prefers fly-by-night stock in feet-on - the-ground (the sure thing). Holding everything else unchanged, if the risk of an asset increases compared to that of alternative resources, its requested quantity would decrease. If the risk of an asset falls relative to that of alternative assets, its demanded quantity will increase.
4.Liquidity- The more liquid an asset is compared to alternative capital, leaving everything else unchanged, the more attractive it is, and the greater the sum of the desired principle of portfolio preference.