IDEAS home Printed from https://ideas.repec.org/a/taf/ufajxx/v75y2019i3p39-69.html
   My bibliography  Save this article

Choosing and Using Utility Functions in Forming Portfolios

Author

Listed:
  • Geoffrey J. Warren

Abstract

Utility functions offer a means to encode objectives and preferences in investor portfolios. The functions allow one to place a score on outcomes and then identify optimal portfolios by maximizing utility. The central theme of this article is that utility functions should be tailored to the investor. I discuss how an appropriate function might be chosen and demonstrate concepts for power utility and reference-dependent utility. A modeling approach is presented that may be applied without resorting to dynamic optimization. The selection of utility functions is illustrated for four investor types.Disclosure: The author reports no conflict of interest. Editor’s Note The original version had a typographical error in Figure 4B, which has been corrected in this version. Submitted 1 October 2018Accepted 20 March 2019 by Stephen J. Brown

Suggested Citation

  • Geoffrey J. Warren, 2019. "Choosing and Using Utility Functions in Forming Portfolios," Financial Analysts Journal, Taylor & Francis Journals, vol. 75(3), pages 39-69, July.
    • Handle: RePEc:taf:ufajxx:v:75:y:2019:i:3:p:39-69
    DOI: 10.1080/0015198X.2019.1618109
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1080/0015198X.2019.1618109
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1080/0015198X.2019.1618109?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:taf:ufajxx:v:75:y:2019:i:3:p:39-69. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Longhurst (email available below). General contact details of provider: http://www.tandfonline.com/ufaj20 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.