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What is isoelastic utility?

Isoelastic utility

It's a term in economics that's used to express utility in terms of consumption or another economic variable of interest to a decision-maker. The isoelastic utility function is the only class of utility functions with constant relative risk aversion, which is why it's also called the CRRA utility function.

Where have you heard about isoelastic utility?

It's rarely alluded to in the financial press, but you'll probably be familiar with it if you're a mathematician, an economist or a sophisticated investor comfortable with complex formulae.

What you need to know about isoelastic utility.

Isoelastic utility theory has been used to draw lessons for portfolio optimisation. It implies that if a given percentage asset allocation is optimal for some current level of wealth, that same percentage asset allocation is also optimal for all other levels of wealth. Investors with isoelastic utility functions therefore have a constant attitude towards risk expressed as a percentage of their current wealth. This property is called constant relative risk aversion.

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