The measurement of risk presented in Markowitz’ work was based on the variance of returns. In spite of penalizing deviation greater than the unity, this methodology does not differentiate positive from negative deviation. This study proposes a measurement of risk in which a utility function is incorporated to describe the characteristics of a rational investor. The disappointment of the investor with the loss is greater than the satisfaction with the gain. This new component, in addition to supplying other interpretations for volatility, seems to be a more effective alert instrument than the usual methodology.
Measurement of Risk; Utility Function; Utility Deviation; Stock Market
