Modern portfolio theory | Wiskunde op Tilburg University

Introduction: In modern portfolio theory utility functions are used to describe the preferences of investors.

Definition: The utility function of an investor is given by

$U(\mu,\sigma)=\mu-\tfrac{1}{2}\alpha\sigma^2,$ with

$\mu$ the expected return,
$\sigma \geq 0$ the corresponding risk,
$\alpha\geq 0$ the risk aversion coefficient of the investor.