This paper considers diversified portfolios in a benchmark framework. A new limit theorem for the approximation of the benchmark, which is the growth optimal portfolio, is obtained. In a diverse market it is shown that there exist approximations for the benchmark that are independent of model specifications. This leads to a robust modeling, calibration and risk management framework. For diversified portfolios with a large number of securities the limit theorem provides significant reductions in the complexity of quantitative applications as statistical inference and Value at Risk calculations.
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Paper provided by Quantitative Finance Research Centre, University of Technology, Sydney in its series Research Paper Series with number
87.
Find related papers by JEL classification: G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data) G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
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