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Merton's portfolio problem is a problem in continuous-time finance and in particular intertemporal portfolio choice. An investor must choose how much to consume and must allocate their wealth between stocks and a risk-free asset so as to maximize expected utility .
Among the first papers using this approach, Diamond (1967) [6] focused directly on the “realistic” market structure consisting of the stock and bond markets. The other set of models explicitly account for the frictions that could prevent full insurance, but derive the optimal risk-sharing endogenously.
On the other hand, bonds and other short-term fixed income securities tend to be a better option for short-term goals because they are typically less volatile than stocks and can help generate ...
Example investment portfolio with a diverse asset allocation. Asset allocation is the implementation of an investment strategy that attempts to balance risk versus reward by adjusting the percentage of each asset in an investment portfolio according to the investor's risk tolerance, goals and investment time frame. [1]
In finance, a holdout problem occurs when a bond issuer is in default or nears default, and launches an exchange offer in an attempt to restructure debt held by existing bond holders. Such exchange offers typically require the consent of holders of some minimum portion of the total outstanding debt, often in excess of 90%, because, unless the ...
The problem can lead to the pernicious inversion of performance ordering with bond ETF's or stocks paying high dividends. [ 6 ] [ 7 ] A variant measure of total return is tax-adjusted or after-tax return , which approximates the effective return that a tax-paying investor actually sees considering taxes paid on distributions.
In a primary market, new stock or bond issues are sold to investors, often via a mechanism known as underwriting. The main entities seeking to raise long-term funds on the primary capital markets are governments (which may be municipal, local or national) and business enterprises (companies).
Not all stock is necessarily equal, as certain classes of stock may be issued, for example, without voting rights, with enhanced voting rights, or with a certain priority to receive profits or liquidation proceeds before or after other classes of shareholders. Stock can be bought and sold privately or on stock exchanges. Transactions of the ...