Value-ranked equity portfolios via entropy pooling

Josef Zorn

Journal of Investment Strategies

Abstract: This paper demonstrates how to directly incorporate common value-investing ideas into the portfolio optimization process. Through minimizing the relative entropy, multiple value rankings are merged with the historical return distribution. This approach yields performance improvements from both a diversification and a predictive perspective across various international stock markets. The predictive component can be attributed to a specific value tilt of the portfolios. Increasing the confidence in the value rankings smoothly exposes a portfolio to the desired value factor.

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Persistent link: https://EconPapers.repec.org/RePEc:rsk:journ6:5988351

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