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Universal portfolios with side information

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2 Author(s)
Cover, T.M. ; Dept. of Stat., Stanford Univ., CA, USA ; Ordentlich, E.

We present a sequential investment algorithm, the μ-weighted universal portfolio with side information, which achieves, to first order in the exponent, the same wealth as the best side-information dependent investment strategy (the best state-constant rebalanced portfolio) determined in hindsight from observed market and side-information outcomes. This is an individual sequence result which shows the difference between the exponential growth wealth of the best state-constant rebalanced portfolio and the universal portfolio with side information is uniformly less than (d/(2n))log (n+1)+(k/n)log 2 for every stock market and side-information sequence and for all time n. Here d=k(m-1) is the number of degrees of freedom in the state-constant rebalanced portfolio with k states of side information and m stocks. The proof of this result establishes a close connection between universal investment and universal data compression

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Information Theory, IEEE Transactions on  (Volume:42 ,  Issue: 2 )