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Power Utility

The most common utility function used is the power utility function. Power utility functions assume a preference for upside deviations and have positive slopes, which reflects a preference for increasing wealth. These utility functions assume that investors prefer to preserve the same percentage allocation to risky assets as their wealth changes.

The power utility function is similar to mean-variance (MV) optimization as it approximates the log-wealth utility by using a quadratic function. Power utility functions are always upward sloping in contrast to the quadratic function which has a turning point.

Category:Understanding the Software -> Optimization