Hello everyone,
I am looking at the formula which maximizes investors’ utility as:
U = E® - .005 x lambda x Var
However, I have also seen:
U=E® - lambda x Var
Why the .005 diff?
Depends on if you’re using whole numbers or decimals.
Whole numbers - u = 12% - 4(this is lambda)*.005* 6(variance)
vs
u = .12-4*.5*.06
The .5/.005 can’t go missing. that would be wrong.
Sorry I read this wrong initially.
When you are calculating utility in the case of an optimization problem of just different portfolios, you use E®-.005*lambda*var®
when you are calculating utility of active returns it’s u = e(r active)-lambda*total active risk.
There ya go sorry for the confusion.
In which reading do you get the utility of active return formula U=E® - lambda x Var ?
Reading 25 (equity portfolio management), section 7.
Remember it’s active return - lambda*active risk, not entire portfolio. Cheers.
The CFAI shouldn’t complicate the life of CFA candidates like that! Why don’t they make the Curriculum more consistent? 
Thank you!!!