Two factors utility approach

Optimization of portfolios composed of securities (equities) is dealt with. The drawbacks of existing methodologies, based on a single factor utility function, are indicated. The two-factor utility function introduced takes into account the expected excess return and expected worst case return (both in monetary units). Assuming that utility is ‘risk averse’ and ‘constant returns to scale’, a theorem on existence of optimum strategy of investments is proven. The optimum strategy is derived in an explicit form. A numerical example is given.