7.13 Taxing risks assets Suppose the asset returns in Problem 7.12 are subject to taxation.

a. Show, under the conditions of Problem 7.12, why a proportional tax on wealth will not affect the fraction of wealth allocated to risky assets.

b. Suppose that only the returns from the safe asset were subject to a proportional income tax. How would this affect the fraction of wealth held in risky assets? Which investors would be most affected by such a tax?

c. How would your answer to part

(b) change if all asset returns were subject to a proportional income tax? Note: This problem asks you to compute the pre-tax allocation of wealth that will result in post-tax utility maximization.