Research on Probability Mean-Lower Semivariance-Entropy Portfolio Model with Background Risk

Abstract EN

In the financial market, investors must deal with uncertain risk, and they also face background risk and many uncertain factors caused by their own characteristics.

Considering the fuzzy nature of these factors as well as investors’ risk preferences, transaction costs, and so on, in order to reduce investment risk, an improved probability entropy measure is introduced, and a probability mean-lower semivariance-entropy model with different risk attitudes is established by using fuzzy sets and probability theory.

To solve the portfolio model, an improved differential evolution algorithm is proposed and a numerical example is given.

The numerical results show that the proposed algorithm is effective and that the model can disperse the financial risk to a certain extent and reasonably solve the portfolio problem under many different conditions.