THE INTERACTION BETWEEN THE DEMANDS FOR INSURANCE AND INSURABLE ASSETS

Holding more of the riskless asset and insuring the risky asset are tw o ways to reduce portfolio risk. These methods can be employed jointly . As a result, the amount of insurance selected to indemnify against p ossible losses from holding a risky asset depends, in general, on the quantities of the risky and riskless assets held in the portfolio, and vice versa. Ln decision models where expected utility is maximized re latively little has been done to integrate these two decisions into a single model. Such a model is formulated in this paper and the interac tion between the demand for insurance and the demand for an insurable risky asset is examined.