The natural mathematics arising in information theory and investment. Mpt is to maximize the return of an investment for a constrained risk. Portfolio theory, information theory and tsallis statistics. It is common knowledge that there is a positive relationship between the risk and the expected return of a financial asset. This chapter introduces modern portfolio theory in a simpli. One of the major concepts that most investors should be aware of is the relationship between the risk and the return of a financial asset. By investing in more than one stock, an investor can reap the benefits of.
The course is intended for 32 academic hours 2 credit points. We can invest in two non dividend paying stocks amazon a and boeing b over the next month. Investment analysis and portfolio management 5 the course assumes little prior applied knowledge in the area of finance. Modern portfolio theory says that it is not enough to look at the expected risk and return of one particular stock. Elements of information theory fundamentals of computational. One of the main objectives of modern portfolio theory. Competitive optimality of the logoptimal portfolio 471. 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. 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. Paul tune school of mathematical sciences, university of adelaide.
This is where information theory comes to be a part and improve this. The contribution of markowitzs theory to information system area portfolio theory is concerned with risk and return. Information theory and portfolio theory elements of information. An entropybased approach to portfolio optimization mdpi. Information geometry in portfolio theory 17 in this section we will introduce a new. Gambling and portfolio selection using information theory uic ece. 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. Pdf information geometry in portfolio theory researchgate. Universal data compression and portfolio selection information. Information theory and the stock market school of mathematical. Risks in individual asset returns have two components. History harry markowitz came up with mpt and won the nobel prize for economic sciences in 1990 for it. 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.
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