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Quantitative Finance · Glossary

What is Certainty equivalent?

Definition 9.7 Quantitative Methods · Chapter 9 — Stochastic Control

The certainty equivalent of a random wealth WW is the sure amount cc with U(c)=E[U(W)]U(c) = \E[U(W)]; over a horizon TT, the certainty-equivalent return is ln⁡(c/W0)/T\ln(c/W_0)/T.

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