1. Financial Markets – Fall, 2019 – Sept 12, 2019

2. Tobin’s and the Risk-Free Asset
What happens to “mean-variance” theory
If there is a riskless asset?
James Tobin, Prof of Economics
Yale University
Winner of Nobel Prize in Economics
1981

3. “The” risk free asset The one with the highest mean Mean
Standard Deviation

4. Combine with Risky Assets
Mean ?
Risky Assets
Risk Free
Asset
Standard Deviation

5. If 1 is zero  P2 = (2)222 (2)2  P =
If one of the standard deviations is equal to zero, e.g. 1 then
 P2 =
(2)222
(2)2
 P =
Which means that:

6. Combine with Risky Assets
Mean
Risk Free
Asset
Standard Deviation

7. Combine with Risky Assets
Mean
The New Feasible Set E
Always combines the risk free asset
With a specific asset (portfolio) E
Risk Free
Asset
Standard Deviation

8. Tobin’s Result Mean Use of Leverage E Risk Free Asset
Standard Deviation

9. The End