The notion of entropy, which is fundamental to the whole topic of this book, is introduced here. Portfolio theory and asset pricing models answers to endofchapter questions. Mpt is to maximize the return of an investment for a constrained risk. The natural mathematics arising in information theory and investment. Definition it is an investment theory based on the idea that riskaverse investors can construct portfolios to optimize or maximize expected return based on a given.
Information geometry in portfolio theory 17 in this section we will introduce a new. Elements of information theory fundamentals of computational. One of the main objectives of modern portfolio theory. The course is intended for 32 academic hours 2 credit points.
Pdf information geometry in portfolio theory researchgate. This chapter introduces modern portfolio theory in a simpli. Markowitz portfolio theory provides a method to analyse how good a given portfolio is based on only the means and the variance of the returns of the assets contained in the portfolio. By investing in more than one stock, an investor can reap the benefits of. It is common knowledge that there is a positive relationship between the risk and the expected return of a financial asset. An entropybased approach to portfolio optimization mdpi. Information theory and the stock market school of mathematical. The contribution of markowitzs theory to information system area portfolio theory is concerned with risk and return. History harry markowitz came up with mpt and won the nobel prize for economic sciences in 1990 for it. Risks in individual asset returns have two components. Portfolio theory, information theory and tsallis statistics. We developed a strategic of optimal portfolio based on information theory and tsallis statistics. Modern portfolio theory mpt is a theory on how riskaverse investors can construct portfolios to optimize or maximize expected return based on a given level of market risk, emphasizing that risk is an inherent part of higher reward.
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