What is the primary equation described in Marowitz's objective function?

The primary equation described in Marowitz's objective function is centered around the concept of utility, which combines both the potential return and the risk associated with an investment portfolio. The correct equation, Utility = Expected return - 0.005λ x variance of market, highlights two key components: the expected return from the investment and the penalty imposed for the portfolio's risk, which is represented by the variance of the market multiplied by a risk aversion coefficient (lambda, λ).

This formulation captures the essence of utility theory in finance, where investors seek to maximize their utility by balancing risk and return. The expected return serves as a measure of the rewards from holding the portfolio, while the second term reflects the costs associated with taking on that risk. Essentially, investors are looking for a portfolio that provides a favorable trade-off between expected return and risk, and this equation succinctly expresses that relationship.

Other options do not fit Marowitz's conceptual framework as clearly. For example, the equation concerning total assets minus liabilities relates more to net worth calculations rather than a utility function. Similarly, equations that describe utility in terms of risk tolerance or the difference between portfolio and market returns do not capture the essence of how investors evaluate expected returns in relation to the risks faced. Thus