Quantifying risk for long-term financial health.
Dr. Sharma has a high income ($350K AGI) but is burdened with $280,000 in student loan debt and the financial responsibilities of running her small medical practice. She is risk-averse due to these liabilities, but recognizes that she needs to aggressively invest to build long-term wealth and potentially pay down her debt faster than the standard repayment schedule.
Using the Expected Utility Calculator, Dr. Sharma can quantify her personal risk tolerance and compare different investment scenarios. By inputting potential investment returns and assigning probabilities, the calculator provides a certainty equivalent, illustrating the risk-adjusted value of each option. This helps Dr. Sharma make data-driven decisions, potentially allocating a portion of her investments to higher-growth assets that she would have previously avoided, and optimize for growth of $10,000 per year while considering risk.
The Expected Utility Calculator requires inputting potential investment outcomes, their associated probabilities, and a risk aversion coefficient. This data is then used to calculate the expected utility and certainty equivalent for each investment option.
$25,000 increase in projected investment portfolio value over 10 years, accounting for risk aversion.
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