I am trying to get my hands on Entropy Pooling which was introduced by Meucci in this paper.

As an example, assume I want to construct a portfolio with five stocks and I have my view on CVaR.

How can I use Entropy-Pooling method to manage my portfolio?

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    $\begingroup$ I like the question, but I think you should provide us with what you've come up so far and where you're stuck. Possibly, provide a link to the paper. $\endgroup$ – SRKX Jul 3 '12 at 10:11
  • $\begingroup$ "I have my view on CVaR as a constraint". So in your question is CVaR a constraint for optimization (in Meucci paper he optimizes for mean-CVaR) or a view? $\endgroup$ – Alexey Kalmykov Jul 3 '12 at 12:45
  • $\begingroup$ This is the paper I mentioned. papers.ssrn.com/sol3/papers.cfm?abstract_id=1542083 I mean, CVaR as a view. $\endgroup$ – Paypay Jul 3 '12 at 16:14

Meucci covers this example precisely in his paper "Fully Flexible Views: Theory & Practice". You can find his code here for three examples related to the paper. The Butterfly Trading example covers the CVAR scenario.

  • $\begingroup$ I think it would have been good for Meucci to have a simple 5 stocks example. His basic example already involves options trading... $\endgroup$ – SRKX Jul 3 '12 at 17:48
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    $\begingroup$ Fair enough. I think Meucci was demonstrating that - unlike Black-Litterman - he can deal with assets that have non-linear payoffs, take views on factors that are statistically related to the assets in question but not a part of the asset pricing function (ex: 10-year spread in his Butterfly trading example), including partial views on aspects of the distribution rather than simply views on relative or absolute return expectations. So he set a high bar to clear to demonstrate the power of entropy pooling. $\endgroup$ – Ram Ahluwalia Jul 3 '12 at 19:08
  • $\begingroup$ I completely agree, but I still think the paper would have benefited from a Entropy Pooling 101 example. I'm thinking about doing 1 for my blog. $\endgroup$ – SRKX Jul 4 '12 at 6:30
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    $\begingroup$ Based on the comment, it seems he is wondering about how to construct CVaR views, not optimize the portfolio to minimize CVaR, which is what the butterfly example does. It is easy to take a view on the tail, but taking a view on the CVaR is slightly more complicated, which is why he has that separate paper on extreme views. $\endgroup$ – John Jul 5 '12 at 14:40

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