On a neglected aspect of portfolio choice: the role of the invested capital

In return-based portfolio choice models A la Markowitz, the amount of capital invested does not play a role, while in expected utility models it does. The aim of this paper is to bring out the connection between the amount of capital invested and the portfolio formation. In a general one-period framework, which also comprises illiquid assets held by the investor and the period income, we present results in finding the optimal portfolio weights and study the influence of the invested capital, the illiquid assets and the income on the portfolio formation. Special emphasis is put on HARA utility functions and the dependence of the amount invested risklessly on the invested capital. As a side result, we find that Markowitz portfolio choice is not fully compatible with expected utility reasoning.