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Objective and subjective entropy measures of portfolio suboptimality

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  • Ati S Sharma

Abstract

The cost of holding a suboptimal portfolio instead of the Kelly-optimal one admits two exact relative-entropy representations. Under the true measure, the expected log-wealth shortfall equals the KL divergence from the true measure to the measure under which the suboptimal portfolio would be optimal. Under that measure, the suboptimal portfolio appears to outperform the Kelly portfolio, and the apparent outperformance equals the reverse KL divergence.

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  • Ati S Sharma, 2026. "Objective and subjective entropy measures of portfolio suboptimality," Papers 2607.09505, arXiv.org.
    • Handle: RePEc:arx:papers:2607.09505
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    1. Eckhard Platen, 2006. "A Benchmark Approach To Finance," Mathematical Finance, Wiley Blackwell, vol. 16(1), pages 131-151, January.
    2. Henry Allen Latane, 1959. "Criteria for Choice Among Risky Ventures," Journal of Political Economy, University of Chicago Press, vol. 67(2), pages 144-144.
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