Notes
* averse: having a strong dislike of or opposition to something.
* risk-averse: disinclined or reluctant to take risks.
- Utility can be thought of as level of satisfaction (happiness).
- Risk Averse (A>1).
- Risk Neutral (A=0).
- Risk Seeker (A<1).
- A single investor’s indifference curves can never intersect.
- The steeper the indifference curve the more risk averse the investor.
Formula
$$ \begin {aligned} U &= E(r) \; – \left [ { 1 \over 2 } A \sigma^2 \right ] \end {aligned} $$
Where;
- U = Utility.
- E(r) = Expected Return.
- A = Coefficient of Risk.
- σ = Standard Deviation (Risk).
- σ2 = Standard Deviation (Risk)2 = Variance of Returns.
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