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Maximizing active return given a level of active risk and risk aversion (formula)

February 5, 2018

Ua = Ra – λaσa^2

Ua = expected utility of the active return of the manager mix

Ra = expected active return of the manager mix

λa = the investor’s trade-off between active risk and active return; risk aversion in active terms

σa^2 = variance of the active return

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