Chapter 11: Expected Utility Analysis
Risk is characterized by probability density and distribution functions, sometimes requiring more than just the first two moments, namely, mean and variance, to settle which of two portfolios is most risky--namely, the third (kurtosis) or higher moments. Expected mean and variance (EV) analysis is introduced as are other methods economists use to facilitate decision making under risk and uncertainty. As noted in Chapter 14, EV analysis is often analyzed using quadratic programming (QP), which is often referred to as risk programming because variance constitutes a quadratic function.