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Mean-Variance Optimization formula

December 30, 2017

Um = E(Rm) – 0.005λσm^2

Um = the investor’s utility for asset mix (allocation) m

Rm = the return for asset mix m

λ = the investor’s risk aversion coefficient

σm^2 = the expected variance of return for asset mix m

The value of 0.005 assumes E(Rm) and σm are expressed as percentages rather than decimals.

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