The investor is interested in the expected return and he is also concerned about the risk and the uncertainty assumed by the investment. One of the most popular concepts used to measure the risk and the uncertainty is the variance and/or the standard
-deviation. In this paper we explore the following issues: Is the standard-deviation a good measure of risk and uncertainty? What are the potentialities of the entropy in this context? Can entropy present some advantages as a measure of uncertainty and simultaneously verify some basic assumptions of the portfolio management theory, namely the effect of diversification?
The maximum entropy principle can be used to assign utility values when only partial information is available about the decision makers preferences. In order to obtain such utility values it is necessary to establish an analogy between probability an
d utility through the notion of a utility density function. According to some authors [Soofi (1990), Abbas (2006a) (2006b), Sandow et al. (2006), Friedman and Sandow (2006), Darooneh (2006)] the maximum entropy utility solution embeds a large family of utility functions. In this paper we explore the maximum entropy principle to estimate the utility function of a risk averse decision maker.
