BFS 2002

Poster Presentation

How can asset allocation benefit from a complex piece of information ?

Nicolas Gaussel, Fabrice Baudoin

The objective of any portfolio manager is to deduce the optimal portfolio strategy linked to his qualitative piece of information. This paper tackles this problem. It investigates a way to translate a given piece of information into a trend and a volatility process, in order to make use of standard portfolio theory. When the agent's information is formulated as the "knowledge of the distribution of a random variable of interest", we provide an explicit link between this information and the trend process, the volatility process being revealed by the option prices. The optimal strategies can then readily be computed and their performances linked to the entropy of the private information. Closed form formulae are obtained in the gaussian case and allows to provide practical examples.