I was trying to understand this risk cost function:
I suppose that comes from Relative Risk Aversion coefficient:
But I need help to understand the intuition behind de cost function and how it is derived.
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%7D%7BU%27(x)%7D%5Ctimes&space;Var(x) "C = -\frac{1}{2}\times \frac{U''(x)}{U'(x)}\times Var(x)")
%7D%7BU%27(x)%7D%5Ctimes&space;x "RRA = -\frac{U''(x)}{U'(x)}\times x")
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1$\begingroup$ It would be helpful if you could provide some context in which the formula is used. Note also that $-\frac{U''(x)}{U'(x)}$ is the coefficient of absolute risk aversion, and $Var(X)$ is sometimes used as a measure of risk contained in random variable $X$. $\endgroup$– Herr K.Jan 31, 2022 at 16:51
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$\begingroup$ Where did you find this cost function? $\endgroup$– High GPAFeb 6, 2022 at 8:54
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