I.1 Basic Questions THIS PAPER ANALYZES the relationship of expectations of future asset yields to the present demand for assets and present asset yields, and how this relationship is affected by transactions costs and liquidation needs. Specifically, three related questions are considered: First, what effect should the existence of transactions costs have upon an investor's decision-making process? Second, how should an investor's asset demands depend upon the target date for his investment program, the level of transactions costs, and his liquidation needs? Third, what hypotheses and. explanations regarding observable individual and market behavior are generated by explicit consideration of target dates, transactions costs, and liquidation needs? Tobin [1965] in a broader discussion of portfolio selection has touched upon some aspects of these questions. However, in dealing with transactions costs Tobin considers only two extreme examples of zero and infinite costs. The present paper provides among other things, a framework for general treatment of transactions costs which yields solutions for intermediate as well as polar cases. The principle vehicle for this analysis is an investor who has at present the sum WO and wants to invest so as to maximize Wt, the expected value of this sum at the end of t periods. One period here means the shortest length of time for which money can be lent at interest. In the existing institutional framework, this length is typically one day. The number of periods t to his target date can be any positive integer. The maximum Wt attainable may be subject to two types of constraints: (1) transactions. costs, specifically a divergence between asked and bid prices on marketable assets, and (2) liquidation needs, specifically requirements to make expenditures out of wealth, or out of income from wealth, prior to the end of t periods. These liquidation needs may be predictable with certainty or may be stochastic. I.2 Relevance of Expected Wealth Maximization The assumed investment objective to maximize expected wealth at a single future date requires some explanation. An example of such a hypothetical investor is someone saving to purchase a retirement annuity, desiring the largest possible expected annuity, and consequently trying to maximize his expected wealth on his retirement date. In this example, liquidation needs, that is, an anticipation of consuming out of wealth before retirement, might