2022 Curriculum Reading 6. page 292.
It is very much confusing one part.
“In this case Um can be interpreted as a certainty-equivalent return - that is, the utility value of the risky return offered by the asset mix,stated in terms of the risk -free return that the investor would value equally.”
Can you explain what is the relationship between risk penalty (second part of the Equation 1) and risk -free return?
“In words,the objective function says that the value of an asset mix for an investor is equal to the expected return of the asset mix minus a penalty that is equal to one-half of the expected variance of the asset mix scaled by the investor’s risk aversion coeffiecent.”
Where can I see one-half of the expected variance on the Equation 1?I do not understand where this one-half is coming from.