The risk aversion coefficient is also referred to as the Arrow-Pratt risk aversion index. When λ is small (i.e., the aversion to risk is low), the pen- alty from the contribution of the portfolio risk is also small, leading to more risky portfolios. Conversely, when λ is large, portfolios with more exposures to risk become more highly penalized. If we gradually increase λ from zero and for each instance solve the optimization problem, we end up calculating each portfolio along the efficient frontier. It is a common practice to calibrate λ such that a particular portfolio has the desired risk profile. The calibration is often performed via backtests with historical data. For most portfolio allocation decisions in investment management applications, the risk aversion is somewhere between 2 and 4.----BY petter kolm's book