Information Geometry of Risks and Returns

Andrei N. Soklakov

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arXiv · 2206.08753

Information Geometry of Risks and Returns

Andrei N. Soklakov

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Abstract

We reveal a geometric structure underlying both hedging and investment products. The structure follows from a simple formula expressing investment risks in terms of returns. This informs optimal product designs. Optimal pure hedging (including cost-optimal products) and hybrid hedging (where a partial hedge is built into an optimal investment product) are considered. Duality between hedging and investment is demonstrated with applications to optimal risk recycling. A geometric interpretation of rationality is presented.

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econ.GN cs.IT math.IT q-fin.EC q-fin.GN

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Andrei N. Soklakov. 2022-06-09. Information Geometry of Risks and Returns. https://arxiv.org/abs/2206.08753

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