TITLE:
Investment Decision Based on Entropy Theory
AUTHORS:
Dechao Yin
KEYWORDS:
Efficient Frontier, Entropy, Expectation-Variance Model, Portfolio Theory
JOURNAL NAME:
Modern Economy,
Vol.10 No.4,
April
19,
2019
ABSTRACT: The study of investment theory
plays an extremely important role in real-life investment activities and is the theoretical basis for determining how investors
invest. The traditional investment theory is mainly the portfolio theory
proposed by Markowitz. The core investment model is the expectation-variance model. However, the traditional expectation
variance model does not completely measure the risk. This paper focuses
on the concept of entropy in the original physics and information theory, and studies the rationality of the
method of measuring the risk in the financial investment field with entropy and
the advantages of other metrics such as the classical variance method. Based on
Markowitz’s portfolio theory, the expectation-variance model is optimized, the
entropy is used to measure the risk of income, and the entropy model is
established to select a more effective portfolio than the expectation-variance
model. This paper not only studies from the theoretical aspect, but also
collects the actual securities data, through the calculation of the actual
data, and uses MATLAB to simulate its
effective boundary, test the theory and the effect of the obtained optimization
model to verify the validity of the model, so that the entropy model can
apply to actual investment activities.