A Comparative Study to Find the Optimal Ordering Quantity of the Risk-Neutral and Risk-Averse Newsvendor


Mahadev Ota
Department of Mathematics & Actuarial Science, B S Abdur Rahman Crescent Institute of Science & Technology, Chennai-600048, Tamilnadu, India
Varun Mohan
Department of Mathematics, Sharda University, Greater Noida, UP, India


This study considers the quadratic utility function and demonstrates that it can be used to describe the risk averse as well as risk neutral investor with some conditions. Finally, by considering the risk profile of the investor at different levels of investor’s initial wealth, we have developed a method to determine the OOQ which maximizes the expected utility. From the numerical examples, it is clear that the OOQ and hence the expected utility varies depending on an investor’s attitude toward the risk and investment decision. At different levels of initial wealth, the attitudes toward risk of the investors are different and the sensitivity analysis demonstrates how an investor can choose the initial wealth and OOQ to maximize his expected utility.

January 16, 2020