DEMAND FOR INSURANCE IN A PORTFOLIO SETTING

This paper takes an additional step toward analyzing the demand for in surance in the context of a portfolio model. An investor is endowed wi th a portfolio containing a risky and riskless asset that can be augme nted by purchasing insurance. Here, insurance is paid for by reducing the quantity of the risky insurable asset, holding the quantity of the riskless asset fixed. In the standard insurance demand model, insuran ce is paid for by reducing the amount of the riskless asset. This dist inction leads to a differed insurance demand function because the oppo rtunity cost of purchasing insurance is now random.