Comparative study of information measures in portfolio optimization problems

This paper presents a rich class of information theoretical measures designed to enhance the accuracy of portfolio risk assessments. The Mean-Variance model, pioneered by Harry Markowitz, revolutionized the financial sector as the first formal mathematical method to risk-averse investing in portfolio optimization theory. We analyze the effectiveness of this with the models that replace expected portfolio variance with measures of information (uncertainty of the portfolio allocations to the different assets) and five major practical issues. The empirical analysis is carried out on the historical data of Indian financial stock indices by application of portfolio optimization problem with information measures as the objective function and constraints derived from the return and the risk. Our findings indicate that the information measures with parameters can be used as an adequate supplement to traditional portfolio optimization models such as the mean-variance model. © The Author(s), under exclusive licence to Springer-Verlag GmbH Germany, part of Springer Nature 2024.