Understanding the Interdependence of MRTs

 Mrts are a great way to leverage existing resources in your portfolio without having to add them to your portfolio all at once. Instead, you can spread your risk by adding just the right mix of instruments and portfolio holdings. A well-diversified portfolio is a powerful hedge against risk because it reduces the potential for negative returns by spreading your risks over a larger geographic area or industry.

In microeconomics theory, the marginal return of technological substitution, also known as technical progress in the economy, is the amount by which an additional unit of any input is needed to raise the output level of another unit. This theory is usually illustrated in the classroom through a case study involving Mrts. In your investment portfolio, if one investment is made based on the theory of marginal returns, then any additional units added to the portfolio must be offset against the initial investment. If you have several are of varying sizes, then adding them all to your portfolio will not raise the total amount of wealth because the marginal return on each is different.

The marginal rate of technological substitution can be thought of as the rate at which Mrts replace other units of capital in the economy. The trick is identifying which assets are the most sensitive to market volatility and are therefore likely to depreciate or increase in value in response to external economic factors. Typically, these investments are made in raw materials or other processes that have high capitalization but low production costs, such as computer manufacturers.

To make an effective portfolio of Mrts, you first need to identify those assets that are sensitive to market changes on the y-axis (good news) and volatile on the x-axis (bad news). One good example of this asset is raw materials like coal, gas and oil. It is relatively easy to identify which sectors of the economy are capital intensive and are thus likely to depreciate or increase in value due to external factors. Once this list is ready, all you have to do is plug it into a stock-flow calculator to determine which sectors of the economy are vulnerable to shocks on the x-axis. You can also use historical data to identify which assets have been sensitive to market fluctuations in the past.

Once you have determined which sectors of the economy are susceptible to shocks on the x-axis, then you can plug the values from the stock-flow calculator into a calculator that identifies the potential loss and gain for every unit trade with each partner in the MRTs. This identification is not as easy as it sounds since trade routes and production processes tend to vary across markets. However, generally, the most susceptible goods or services are those that are sensitive to price changes between the suppliers (i.e. producers) and the users (i.e. consumers).

The key to identifying which areas are vulnerable to shocks in the MRT model is to determine their relationship to economic variables such as income, capital, technology and geographic location. It is important to note that there is considerable overlap between the main components of the MRT i.e. production costs, fixed and variable costs and transport infrastructure i.e. accessibility to rail stations.

Read about the relation of MRTS with the isoquants, Elasticity Of Substitution, Marginal Product of Labor(MPL), Marginal Rate of Substitution on thekeepitsimple and you can read about all the topics related to management.