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Asset Pricing and Entropy
Asset Pricing and Entropy

Author(s): Mihály Ormos, Dávid Zibriczky
Subject(s): Business Economy / Management, Evaluation research
Published by: Masarykova univerzita nakladatelství
Keywords: Asset Pricing; Entropy; Risk measure;
Summary/Abstract: We investigate entropy as a novel risk measure which explains the equity premium of securities and portfolios in a simpler way and at the same time with higher explanatory power than the beta parameter of the capital asset pricing. To measure therisk of an investment opportunity the portfolio theory applies the variance of the return, and show that the risk can be reduced by diversification and the systematic risk (beta) isapplied as the risk measure. Entropy represents a measure of the uncertainty of aprobability variable.