Explicit vs Implicit objective function and costs

CFA Level III
#1

I am unable to understand the difference between

  1. Explicit vs Implicit objective function

  2. Explicit vs Implicit costs

Please help!

#2

Explicit cost = Any measurable amount of money that something costs.

implicit cost = when a behavior or consumption yields negative utility (subjectively measured only by the specific individual in “Utils”, but can then be translated to dollars by the same individual).

therefore… implicit benefit = added utility through consumption.

no idea on your first question tho.

#3

Guess they really changed the curriculum :broken_heart:

#4

An objective function is the mathematical function that is to be solved. Because we are talking about utility, the objective function calculates (or tries to quantify) Utility given a set of variables that affect utility (i.e consumption):

U = F©

where U is utility and C is consumption

The difference between an explicit and an implicit function is more of a mathematical field, probably not relevant for the exam.

U = F© is an explicit function

U = F(C,U) is an implicit function … U is in function of C and U itself at the same time.

A simpler example of function U as implicit function would be 0 = F(C,U), and probably the book refers. I have not been there yet btw.

Hope this helps.

#5

So this question is basis page 470 in volume 4- where they call out an explicit objective function as:

MAX (1/3 Size+1/3 Value+1/3 Momentum)

I really didn’t get what they were talking about when they mentioned that formula. Hence the question

#6

Related question - Equity PM - Objective Function pg 473

Objective function for all managers is mentioned as explicit. While its clear for Manager A, its not obvious for B & C. Can anyone throw some light on this!!