How to price information by Kullback-Leibler entropy and a moment-return relation for portfolios

published in: International Journal of Theoretical and Applied Finance 4(3), June 2001, 535-543, doi:10.1142/S0219024901001103
(Download preprint)

A connection between the notion of information and the concept of risk and return in portfolio theory is deduced. This succeeds in two steps: A general moment-return relation for arbitrary assets is derived, thereafter the total expected return is connected to the Kullback-Leibler information. With this result the optimization problem to maximize the expected return of a portfolio consisting of n subportfolios by moment variation under a given value-at-risk constraint is solved. This yields an ansatz to price information.