# Where does this risk cost function come from?

I was trying to understand this risk cost function:

$C&space;=&space;-\frac{1}{2}\times&space;\frac{U''(x)}{U'(x)}\times&space;Var(x)$

I suppose that comes from Relative Risk Aversion coefficient:

$RRA&space;=&space;-\frac{U''(x)}{U'(x)}\times&space;x$

But I need help to understand the intuition behind de cost function and how it is derived.

• 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 $X$. Jan 31, 2022 at 16:51
• Where did you find this cost function? Feb 6, 2022 at 8:54