How Do I Choose the Best Investment Assets?

Financial asset selection refers to the selection of investment portfolios for various financial assets in the financial investment market in order to obtain the best investment returns while avoiding or reducing investment risks.

Financial asset selection

The factors that influence the choice of financial assets mainly include the following aspects. ^[1]

On the basis of inheriting the flow preference theory, contemporary Keynesians combined with the post-war capitalist economic development and the new situation in the financial field, and believed that Keynes s adjustment theory of financial assets and currency credit theory were too simple: modern Keynesians used financial asset selection The theory replaces Keynes's flow preference theory. ^[2]

1. Theory of return and risk comparison.

The theory of financial asset selection selects the optimal combination of financial assets by analyzing the returns and risks of various financial assets. The theory of financial asset selection believes that if future returns are determined, then people will naturally keep the assets with the highest interest rates. Seeking maximum benefits. However, in reality, people cannot predict the future, so they usually invest their assets in assets with lower returns and higher security, and assets with higher returns, despite the risks.

Tobin pointed out in his article "Liquidity Preference as a Risk-Resistant Act" (1958) that holding bonds can earn interest but at the same time bear the risk of falling bond prices; while holding money has no gain, it is not necessary Taking risks (without considering price changes) When an investor invests all of his capital in bonds, his expected return is extremely high, but at this time, he also bears the greatest risk; when he holds currency and bonds each At half the time, his expected returns and risks assumed are also at the midpoint; when he does not buy bonds, but only holds currency, his expected returns and risks assumed are zero. It can be seen that risks and returns are the same, and because economic entities have different attitudes toward risks, their choices are also very different: Tobin therefore divided investors into three types, that is, they prefer to be safe and avoid as much as possible. Risk averters for accidental losses; risk enthusiasts who love risk and are keen to pursue unexpected returns; and risk neutrals who consider only expected returns regardless of risk, and the vast majority are risk aversers. Tobin takes this type of investor as the main object and analyzes people's asset selection behavior.

Tobin assumes that for risk averters, the marginal utility of income decreases with increasing income, and the marginal utility of risk increases with increasing risk. According to this assumption, when someone has only one When there is no currency and no bond, this person will definitely exchange this part of currency for bonds, because the utility of the interest income obtained from it will be very large, and the negative effect of the risk at the same time will be relatively small. As soon as the utility exceeds this negative utility, the investor will continue to increase the share of the bond in his assets: composition, and decrease the share of the currency: until the marginal utility of the newly added bond to the investor no longer exceeds what it has Bring the marginal negative effects so far. Similarly, the investor will not let the bond monopolize all his assets, but will continue to reduce the bond holdings and increase the currency holdings until the last reduction of a bond (or the last increase of a unit of currency) brings investors The marginal utility is equal to the marginal negative utility it brings. At this time, the total utility of the investor has reached a maximum, so Tobin theoretically explained the economic behavior of people holding both currency and bond assets.

In this way, the conclusion is that the interest rate is inversely proportional to the amount of money, except that Keynes's simplified choice is replaced by a diversified financial asset portfolio theory: currency is only one type of financial asset, and changes in the amount of other financial assets will also lead to financial assets Changes in portfolio. Therefore, Tobin believes that his asset selection theory is more realistic than Keynes's liquidity preference theory.

2. The complement of the currency to the economic transmission mechanism.

In terms of the transmission mechanism of the effect of currency on the economy, Keynes's transmission mechanism is the marginal efficiency of capital and interest rates. After the increase in the amount of money, two factors were used to influence investment and then to GDP. Modern Keynesians believed that this analysis was too simple and mechanized. They developed the following three channels to replace the original analysis.

(1) Capital cost effect. This is an expansion and extension of the financial asset selection theory. The theory of financial asset selection simply chooses the best combination among various financial assets, and the cost of capital effect expands the scope of capital to include both financial assets and physical assets. People can analyze the risks and returns among currencies, bonds, cars, houses, etc., and choose the most violent combination. If the amount of money increases, people will buy bonds, causing bond prices to rise, interest rates to fall, and interest rates to fall. This stimulates increased investment in the physical sector. The conclusion is the same as Keynes's theory that influences economic activity through the effects of marginal capital efficiency and interest rates.

(2) Wealth effect. As mentioned earlier, the increase in the amount of money promotes the rise in bond prices, the decline in interest rates, and the decline in interest rates stimulates the increase in investment, thereby increasing the demand for capital goods and also increasing its prices. In this way, the owners of financial assets and physical assets have increased their prices due to currency increases Rise and become richer-this is the wealth effect, people become richer and increase consumer spending, so the wealth effect of monetary policy will greatly affect consumer behavior.

(3) The effect of loan distribution. Most people think that the supply and demand of borrowing capital are balanced and determined by market interest rates. In fact, other factors also affect the balance of the lending market. For example, commercial banks are willing to make short-term loans and unwilling to make long-term loans. Financial institutions take measures other than interest rates. Affecting borrowing and so on will affect the borrowing balance. Modern Keynesians believe that credit distribution is one of the channels through which monetary policy comes into play.

To sum up, although the modern Keynesians made a more in-depth and detailed analysis of the transmission machine, their conclusions are still the same as Keynes's. Monetary policy does not directly affect economic activities through indirect channels.