An Entropy-Based Approach to Portfolio Optimization

Entropy

PeterJoseph Mercurio¹  Yuehua Wu¹  Hong Xie² 

[1] Department of Mathematics and Statistics, York University, Toronto, ON M3J 1P3, Canada;Manulife Financial Corp, Toronto, ON M4W 1E5, Canada;

关键词: return entropy;    portfolio optimization;    entropy portfolio optimization;    portfolio selection;    markowitz mean variance;    investment risk;    modern portfolio theory;    capital asset pricing model;    diversification;   

DOI  :  10.3390/e22030332

来源: DOAJ

【 摘 要 】

This paper presents an improved method of applying entropy as a risk in portfolio optimization. A new family of portfolio optimization problems called the return-entropy portfolio optimization (REPO) is introduced that simplifies the computation of portfolio entropy using a combinatorial approach. REPO addresses five main practical concerns with the mean-variance portfolio optimization (MVPO). Pioneered by Harry Markowitz, MVPO revolutionized the financial industry as the first formal mathematical approach to risk-averse investing. REPO uses a mean-entropy objective function instead of the mean-variance objective function used in MVPO. REPO also simplifies the portfolio entropy calculation by utilizing combinatorial generating functions in the optimization objective function. REPO and MVPO were compared by emulating competing portfolios over historical data and REPO significantly outperformed MVPO in a strong majority of cases.

【 授权许可】

Unknown