Volatility Lowers Expected Utility

Extending the volatility explorer: CARA expected utility, certainty equivalent calculations, and portfolio choice

Expected Return $\mu$ ($r^f = 5\%$)

10.0%

Annual Volatility $\sigma$

20%

Risky portfolio share $\alpha$

100%

Risk aversion $\gamma$

0.10

Mean wealth

Certainty equivalent

Simulated paths

Arithmetic mean return

10.0%

Volatility

$1 becomes (mean, 30yr)

$17.45

Certainty equivalent (30yr)
$17.45

Certainty-equivalent annual return
10.0%