Optimal asset allocation: risk and information uncertainty

In asset allocation problem, the distribution of the assets is usually assumed to be known in order to identify the optimal portfolio. In practice, we need to estimate their distribution. The estimations are not necessarily accurate and it is known as the uncertainty problem. Many researches show that most people are uncertainty aversion and this affects their investment strategy. In this article, we consider risk and information uncertainty under a common asset allocation framework. The effects of risk premium and covariance uncertainty are demonstrated by the worst scenario in a set of measures generated by a relative entropy constraint. The nature of the uncertainty and its impacts on the asset allocation are discussed.