Journal
RESEARCH IN INTERNATIONAL BUSINESS AND FINANCE
Volume 21, Issue 2, Pages 134-160Publisher
ELSEVIER SCIENCE BV
DOI: 10.1016/j.ribaf.2005.12.002
Keywords
Approximate probabilities; Entropy; Portfolio selection; Risk analysis; Fuzzy theory; Decision analysis
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This paper extends the assessment of approximate probabilities in two important directions. The first is to investigate some mathematical relations between the probability ranges and derives the most unbiased probability for the case when the limits are subjectively defined. The second is to suggest a simple method to determine the optimal solution which represents the optimal portfolio proportions of securities that possess the minimum risk measured by the maximum entropy measure. The paper considers the derivation of portfolio modeling under a fuzzy situation using probability theory, and provides various other (non-probabilistic) scenarios with their utility in risk modeling. A simple method for identification of mean-entropic frontier is proposed. Then, a comparison of mean-variance procedure with the discrete mean-entropic method is implemented by an example. (C) 2005 Elsevier B.V. All rights reserved.
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