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Shannon’s Demon & How Returns Can Be Created Out Of Thin Air — Richmond Quantitative Advisors

richmondquant.com · 2,446 words · saved by 2 readers

Can assets with little-to-no expected returns still benefit a portfolio over time? In this RQA Insights piece, we walk through a fairly unknown concept in investing that could have tremendous power in successfully managing portfolios over time - particularly in today's low yield environment.

Summary & Key Findings A little-known concept called Shannon’s Demon may actually be a vital tool for increasing returns and minimizing risks in investor portfolios over time. As we’ll show, the mathematical underpinnings of Shannon’s Demon can actually make it possible to generate positive returns at the portfolio level, even when all of the portfolio’s individual holdings are expected to produce zero, or even negative, returns over time. Given the market environment as of this writing, which is characterized by near-zero bond yields and all-time high U.S. stock valuations, we feel the concep

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