2013/08/25 by Soumik Pal, Ting-Kam Leonard Wong, Pal, Soumik +2
Economics, Econometrics and Finance · Mathematics · #Complex Systems and Time Series Analysis #FOS: Economics and business #FOS: Mathematics #Financial Markets and Investment Strategies #Portfolio Management (q-fin.PM) #Probability (math.PR) #Stochastic processes and financial applications #math.PR #q-fin.PM
paper · pdf · doi:10.48550/arxiv.1308.5376
21 pages, 7 figures. Substantially revised
openalex publication_date 2013/08/25 · arxiv created 2016/01/01 · arxiv updated 2016/01/05 · openalex created_date 2025/10/10 · openalex updated_date 2026/07/28
We introduce a pathwise approach to analyze the relative performance of an equity portfolio with respect to a benchmark market portfolio. In this energy-entropy framework, the relative performance is decomposed into three components: a volatility term, a relative entropy term measuring the distance between the portfolio weights and the market capital distribution, and another entropy term that can be controlled by the investor by adopting a suitable rebalancing strategy. This framework leads to a class of portfolio strategies that allows one to outperform, in the long run, a market that is diverse and sufficiently volatile in the sense of stochastic portfolio theory. The framework is illustrated with several empirical examples.