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The Maximum Entropy Principle and the Modern Portfolio Theory

Author

Listed:
  • Ailton Cassetari

    (Banco Sudameris-Brasil S/A)

Abstract

In this work, a capital allocation methodology base don the Principle of Maximum Entropy was developed. The Shannons entropy is used as a measure, concerning the Modern Portfolio Theory, are also discuted. Particularly, the methodology is tested making a systematic comparison to: 1) the mean-variance (Markovitz) approach and 2) the mean VaR approach (capital allocations based on the Value at Risk concept). In principle, such confrontations show the plausibility and effectiveness of the developed method.

Suggested Citation

  • Ailton Cassetari, 2003. "The Maximum Entropy Principle and the Modern Portfolio Theory," Brazilian Review of Finance, Brazilian Society of Finance, vol. 1(2), pages 271-300.
    • Handle: RePEc:brf:journl:v:1:y:2003:i:2:p:271-300
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    More about this item

    Keywords

    asset alocation; portfolio optimization; risk measures;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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