James Tobin, an American economist, in his analysis makes a valid assumption that people prefer more wealth to less. According to him, an investor is faced with a problem of what proportion of his portfolio of financial assets he should keep in form of ready money (which earns no interest) and in form of investment (which earns interest) such as bonds. An individual’s portfolio may also consist of more risky assets such as shares.
According to Tobin, when individuals are faced with various safe and risky assets, they diversify their portfolio by holding a balanced combination of safe and risky assets.
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