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Abstract

Our main objective in this paper is to revisit Markowitz's (1952) mean-variance approach by applying Shannon Entropy as an alternative measure of financial risk. We studied 33 randomly selected stocks of the Tunis Stock Exchange, representing the daily values of the Tunindex over a period of 8 years. The obtained results indicate that entropy behaves in a similar way to standard deviation, as it decreases depending on the number of stocks held in a portfolio. Likewise, Sharpe single-index model was reinterpreted under entropy theory where total risk is divided into systematic and non-systematic risk. Then, standard measures like standard deviation or beta seem to be inadequate to assess risk and uncertainty. Consequently, entropy offers an ideal alternative to identify investment-related risk. Contribution/ OriginalityThe current paper proposes an alternative approach to portfolio selection. Entropy is one of the main concepts of information theory and market participants react to information when taking decisions. Entropy is believed to contribute to significantly improving the assessment of systematic and specific risks and thus assets pricing.