Research And Application Of Entropy Theory In Portfolio Investment Decision

Entropy theory is called by Einstein as primary principle of science. The application of entropy theory in portfolio investment decision is researched in this paper. Firstly, three-dimensions entropy measure criteria for risk based on Shannon information entropy is studied. This method is applied in portfolio investment decision. Three-dimensions entropy decision making model for portfolio investment has been established. By using the Matlab software, we analyse the investment decision of 30 index stosks of Shanghai Security Market. Suitable stocks selecting by this model have been made optimal portfolios. The empirical study show that the optimal portfolios of stocks selecting by three-dimensions entropy decision making model have a bigger expected utility and a smaller risk than the optimal portfolios selecting by only using expected utility model. Furthermore, the efficient frontier derived by the optimal portfolios of stocks selecting by three-dimensions entropy decision making model can fit the efficient frontier of optimal portfolios derived from the whole stocks. The three-dimensions entropy decision making criteria can help investors select a proper number of suitable stocks to make portfolio. Secondly, we produce entropy weighting double points method by combining entropy weighting method and double points method. Detailed thoughts and computing process of this method are presented. And this method is applied in evaluating stock investment value. The empirical study of six kinds of steel stocks show that entropy weighting double points method has evident predominance in evaluating the relative investment value of stocks. It can faithfully evaluate the investment value of stocks. So this method can provide appropriate advices for investors.