Before revision: We introduce a framework to analyze the relative performance of a portfolio with respect to a benchmark market index. We show that this relative performance has three components: a term that can be interpreted as energy coming from the market fluctuations , a relative entropy term that measures "distance " between the portfolio holdings and the market capital distribution, and another entropy term that can be controlled by the trader by choosing a suitable strategy.
After revision: We introduce a framework to analyze the relative performance of a portfolio with respect to a benchmark market portfolio. In this energy-entropy framework, the relative performance is decomposed into three components: a term that can be interpreted as energy coming from the market fluctuations , a relative entropy term that measures "distance " between the portfolio holdings and the market capital distribution, and another entropy term that can be controlled by the trader by choosing a suitable strategy.