Utility functions as the basis for investment portfolio creation

Abstract

Purpose: the author analyzes the utility functions as the basis for optimal investment portfolio creation. Discussion: the theory of expected utility addresses the issues of the rationality of economic agents actions. This theory includes several axioms. John von Neumann and Morgenstern considered these axioms in research. These axioms impose certain requirements on the properties of the utility functions. The author explores the possible properties of indifference curves to understand the possible types its configurations. A graphical representation of utility functions is the convenient instrument for this research. The results of the graphical analysis outlined the problems at utility functions analytical building. The investor needs to compare indifference curves with the efficient set for the optimal portfolio selection. Results: the author analyzed the utility functions as the basis for investment portfolio creation. The writer considered the basic axioms of expected utility theory, examined the basic types of utility functions and explored the procedure of the investment portfolio formation in view of utility functions.