Performance of Portfolios Based on the Expected Utility-Entropy Fund Rating Approach.

Yang and Qiu proposed and reframed an expected utility-entropy (EU-E) based decision model. Later on, a 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 the 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.

The predictive ability of the expected utility-entropy based fund rating approach: A comparison investigation with Morningstar ratings in US.

In this paper, we propose an alternative fund rating approach based on the Expected Utility-Entropy (EU-E) decision model, in which the measure of risk for a risky action was axiomatically developed by Luce et al. We examine the ability of this approach as an alternative fund rating approach for its ability to potentially mitigate the drawbacks of the risk measure used in Morningstar ratings, and investigate the ability of the EU-E model based and Morningstar ratings to predict mutual fund performance. Overall, we find that the risk measure used in both models plays a defining role in their ability to predict future fund performance, and that the EU-E model can effectively consider the behavioral decisions of an investor.