If an Optimal Portfolio of Risky Assets Can Be Identified,why

question 68

Essay

If an optimal portfolio of risky assets can be identified,why should investors mix that portfolio with risk-free securities?

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Definitions:

Producer Surplus

The difference between what producers are willing to accept for a good versus what they actually receive, often due to higher market prices.

Underproduction

The situation where the production of goods or services is below an optimal level or capacity, often leading to shortages.

Nonexcludability

A characteristic of goods or services that makes it impossible to prevent people from consuming or using them, regardless of whether they have paid for them or not.

Free-Riding

The practice of benefitting from a good or service without paying for it or contributing to its provision, often discussed in the context of public goods.