 Financial Terms Utility function

# Definition of Utility function ## Utility function

A mathematical expression that assigns a value to all possible choices. In portfolio theory the
utility function expresses the preferences of economic entities with respect to perceived risk and expected return.

# Related Terms:

## Indifference curve

The graphical expression of a utility function, where the horizontal axis measures risk and
the vertical axis measures expected return. The curve connects all portfolios with the same utilities according
to g and s .

## Optimal portfolio

An efficient portfolio most preferred by an investor because its risk/reward characteristics
approximate the investor's utility function. A portfolio that maximizes an investor's preferences with respect
to return and risk.

## Aggregate Production Function

An equation determining aggregate output as a function of aggregate inputs such as labor and capital.

## Consumption Function

The relationship between consumption demand and disposable income. More generally, it refers to the relationship between consumption demand and all factors that affect this demand.

## functional classification

a separation of costs into groups based on the similar reason for their incurrence; it includes
cost of goods sold and detailed selling and administrative
expenses

## objective function

the linear mathematical equation that
states the purpose of a linear programming problem

## Probability density function

The probability function for a continuous random variable. ## Probability function

A function that assigns a probability to each and every possible outcome.

## Utility

The measure of the welfare or satisfaction of an investor or person.

## Utility value

The welfare a given investor assigns to an investment with a particular return and risk.

## Replacement Value

Cost of acquiring a new asset to replace an existing asset with the same functional utility.