 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.