Portfolio Theory, Asset Demand and Taxation: Comparative Statics with Many Assets,” The Review of Economic Studies

From the point of view of descriptive economic theory the main purpose of the theory of portfolio choice is the derivation of empirically meaningful restrictions on asset demand functions. Tobin's path-breaking paper [25] was clearly focussed on this objective. However, his model had some objectionable features which have frequently been pointed out by critics; see e.g. Arrow [3], Borch [5] and Feldstein [9]. First, it is based on very restrictive assumptions about the nature of preference orderings and/or subjective proba-bilities. Second, the quadratic utility function has some empirically unacceptable impli-cations, e.g. that every risky asset is an inferior good; see e.g. Arrow [2], [3]. There exists by now a large literature on portfolio theory, much of which is concerned with generalizations of the mean-variance approach. However, this literature presents a confusing picture to the economist who approaches it with a background in the general theory of consumer demand, which most economists tend to regard as a model for any theory ofindividual choice. In that theory one begins with a very general set of assumptions, the most important of which-given the axioms ensuring the existence of a utility function are quasi-concavity and differentiability of the utility function. Once the results using thi