Portfolio Entropy : Incorporating Investor's Risk Appetite for Long-Term Asset Allocation

Portfolio Entropy is a method for optimal long-term asset allocation that incorporates investor’s risk appetite in the context of classical information theory. It addresses a gap between portfolio allocation practice and standard portfolio theory. The method is based on the principle of maximum entropy. We implement it in portfolios of low-cost, liquid, broad-based Exchange Traded Funds (ETFs) and show that entropic portfolios outperform benchmark portfolios for a selected risk-return ratio