Portfolio choice,consumption and welfare when rates of return are related to prices of consumer goods

This paper generalizes the two period model of portfolio selection under uncertainty by decomposing the aggregate consumption in each period into several goods, the prices of some of which are positively related to rates of return on some assets. The effect of these relations on the choice of portfolio is analyzed. The effects on the chosen portfolio of a lateral translation and of a mean preserving increase in the risk of the distributions of the random variables are analyzed. A generalization of the Hicks compensation to the case where the prices of consumer goods are positively related to rates of return on assets is offered and welfare implications are drawn.