I would like to model different type of investors, hence I need to find some kind of utility functions to optimize. Apart from very abstract exponential utility function, I couldn't find any proper one. Frankly speaking, I would like to find some kind of more realistic criteria rather than type of abstract utility function. For example, for risk-neutral investor I have two questions:

1)Is it possible to use Sharpe ratio? (Can it be named as a criterion for risk-neutral?)

2)Can I use CVaR/VaR in denominator of SR (instead of StdDev)? If no, why not? I think, this will better account for fat tails.

If there are papers on this topic (utility functions for different investing styles), I would really appreciate it!

Thank you in advance!

  • For the first question: Let me ask you a question. Do the risk-neutral investor have a feeling of risk?
  • For the second question: Sharpe Ratio tries to capture the excess return over the risk free rate. But you need to adjust it with the risk associated with your portfolio. So it depends on the type of risk measure you employ.
  • $\begingroup$ 1) Well, I guess, no. However, in my opinion it is worth considering someone with risk feeling between risk-aversive and gambling, which means that a this type of person has some preferences about risks 2) I think I didn't get your point here. Do you mean that there are no practical limitations on risk measure to employ here? $\endgroup$ – Gcube Apr 25 at 15:28
  • $\begingroup$ 2) As I remember there exist modified versions of Sharpe Ratio using other measures of risk. The reasoning behind the ratio as I guess is the trade-off between return (reward) and risk. $\endgroup$ – David Nguyen Apr 25 at 16:01

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