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Performance of Portfolios Based on the Expected Utility-Entropy Fund Rating Approach
1 , 1 , 1 , * 2 , 3
1  Business School, The University of Western Australia, Perth 6009, Australia
2  Beihang University
3  School of Economics and Management, Beihang University, Beijing 100083, China


Yang and Qiu proposed and reframed an expected utility-entropy (EU-E) based decision model, later on similar numerical representation for a risky choice was axiomatically developed by Luce et al. under the condition of segregation. Recently, we established a fund rating approach based on the EU-E decision model and Morningstar ratings. In this paper, we apply the approach to US mutual funds, and construct portfolios using the best rating funds. Furthermore, we evaluate the performance of the fund ratings based on EU-E decision model against Morningstar ratings by examining the performance of the three models in portfolio selection. The conclusions show that portfolios constructed using the ratings based on the EU-E models with moderate tradeoff coefficients perform better than those constructed using Morningstar. The conclusion is robust to different rebalancing intervals.

Keywords: expected utility-entropy; fund rating; risk; portfolio; performance