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.
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