Functionally Generated Portfolios
Functionally generated portfolios are a generalization of the entropy-weighted portfolio defined in Section 2.3. In this chapter we show that a broad range of functions can be used to generate portfolios, and for functionally generated portfolios, a decomposition of the relative return analogous to that of the entropy-weighted portfolio in Theorem 2.3.4 remains valid. Theorem 2.3.4 is a prototype for the general results we present here.
KeywordsOption Price Entropy Function Market Portfolio Arbitrage Opportunity Weak Diversity
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