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Diversified Portfolios in a Benchmark Framework

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Abstract

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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Bibliographic Info

Paper provided by Quantitative Finance Research Centre, University of Technology, Sydney in its series Research Paper Series with number 87.

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Date of creation: 01 Jan 2003
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Handle: RePEc:uts:rpaper:87

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Related research

Keywords: benchmark model; growth optimal portfolio; diversified portfolio; diverse market; tracking rate; value at risk;

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Cited by:
  1. David Heath & Eckhard Platen, 2003. "Pricing of index options under a minimal market model with log-normal scaling," Quantitative Finance, Taylor & Francis Journals, vol. 3(6), pages 442-450.
  2. Eckhard Platen, 2003. "Modeling the Volatility and Expected Value of a Diversified World Index," Research Paper Series 103, Quantitative Finance Research Centre, University of Technology, Sydney.
  3. Eckhard Platen & Jason West, 2003. "Fair Pricing of Weather Derivatives," Research Paper Series 106, Quantitative Finance Research Centre, University of Technology, Sydney.

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