An Entropy-Based Approach to Portfolio Optimization.

• 影响指数: 2.738
• 发表时间: Mar 2020 14
• 来源期刊: Entropy (Basel)
• DOI: 10.3390/e22030332
• PMID: 33286106
• 文章类型: Journal Article
• 中科院分区: Q2
• 作者列表: Mercurio PJ,Wu Y,Xie H

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

Abstract

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.