Journal of Investment Strategies

Risk.net

Value-ranked equity portfolios via entropy pooling

Josef Zorn

  • This article shows how to synthesize mean-variance efficiency with value investing.
  • Multiple value rankings are merged with the market by minimizing the relative cross-entropy.
  • This approach allows for smoothly blending a mean-variance efficient portfolio to a desired value factor exposure.
  • Resulting portfolios gain both from diversification and the predictive content in value rankings.

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.

Sorry, our subscription options are not loading right now

Please try again later. Get in touch with our customer services team if this issue persists.

New to Risk.net? View our subscription options

You need to sign in to use this feature. If you don’t have a Risk.net account, please register for a trial.

Sign in
You are currently on corporate access.

To use this feature you will need an individual account. If you have one already please sign in.

Sign in.

Alternatively you can request an individual account here