LRT with two assets. We can use the model in Question 3 to examine the implications of LRT for the investor’s response to wealth changes. As the investor’s wealth varies the optimal D varies and...

LRT with two assets. We can use the model in Question 3 to examine the implications of LRT for the investor’s response to wealth changes. As the investor’s wealth varies the optimal D varies and traces a locus of state-contingent incomes in ( y1, y2) space analogous to the income consumption curve in the consumer model in Chapter 2. Show that this locus is a straight line if and only if the investor has LRT preferences.