1. What is Expected Utility for Stocks?

Expected Utility (EU) is a concept in decision theory that calculates the average utility of all possible outcomes of a stock investment, weighted by their probabilities. It helps investors make rational decisions under uncertainty.

2. How Does the Calculator Work?

The calculator uses the Expected Utility formula:

Where:

• \( Probability_i \) — Probability of outcome i (0 to 1)
• \( Utility_i \) — Utility value of outcome i in utils
• \( EU \) — Expected Utility in utils

Explanation: The equation calculates the weighted average of utilities, where weights are the probabilities of each outcome.

3. Importance of Expected Utility Calculation

Details: Expected Utility helps investors compare different investment options by considering both potential returns and the investor's risk preferences.

4. Using the Calculator

Tips: Enter probabilities (must sum to ≤1) and corresponding utility values. Probabilities must be between 0 and 1.

5. Frequently Asked Questions (FAQ)

Q1: What is utility in this context?
A: Utility represents the subjective value or satisfaction an investor derives from a particular investment outcome.

Q2: How many outcomes can I analyze?
A: This calculator handles two outcomes. For more complex scenarios, you would need to extend the calculation.

Q3: What's a good expected utility value?
A: Higher values indicate more preferred options, but the absolute value depends on your utility scale.

Q4: How do probabilities affect the result?
A: Higher probability outcomes have greater influence on the final expected utility.

Q5: Can I use this for portfolio analysis?
A: Yes, you can calculate EU for different portfolio options to compare them.