Utility-based acceptability indices

TL;DR

This paper introduces a new class of performance measures for portfolio evaluation based on utility functions, analyzing their properties and implications for long-term investment strategies.

Contribution

It proposes a novel utility-based acceptability index framework and examines its theoretical properties and impact on portfolio optimization and dynamics.

Findings

The new indices are well-posed under generic conditions.

They establish a link between portfolio dynamics and utility functions.

The framework is applicable in long-term investment settings.

Abstract

In this short paper we introduce a new class of performance measures based on certainty equivalents defined via scaled utility functions. We analyse their properties, show that the corresponding portfolio optimization problem is well-posed under generic conditions, and analyse the link between portfolio dynamics, benchmark process, and utility function choice in the long-run setting.