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Approximating Large Diversified Portfolios


  • Norbert Hofmann
  • Eckhard Platen


This paper considers a financial market with asset price dynamics modeled by a system of lognormal stochastic differential equations. A one-dimensional stochastic differential equation for the approximate evolution of a large diversified portfolio formed by these assets is derived. This identifies the asymptotic dynamics of the portfolio as being a lognormal diffusion. Consequentially an efficient way for computing probabilities, derivative prices, and other quantities for the portfolio are obtained. Additionally, the asymptotic strong and weak orders of convergence with respect to the number of assets in the portfolio are determined. Copyright Blackwell Publishers, Inc. 2000.

Suggested Citation

  • Norbert Hofmann & Eckhard Platen, 2000. "Approximating Large Diversified Portfolios," Mathematical Finance, Wiley Blackwell, vol. 10(1), pages 77-88.
  • Handle: RePEc:bla:mathfi:v:10:y:2000:i:1:p:77-88

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    Cited by:

    1. Eckhard Platen & Renata Rendek, 2009. "Simulation of Diversified Portfolios in a Continuous Financial Market," Research Paper Series 264, Quantitative Finance Research Centre, University of Technology, Sydney.
    2. Lim Kian Guan & Liu Xiaoqing & Tsui Kai Chong, 2004. "Asymptotic dynamics and value-at-risk of large diversified portfolios in a jump-diffusion market," Quantitative Finance, Taylor & Francis Journals, vol. 4(2), pages 129-139.
    3. Truc Le & Eckhard Platen, 2006. "Approximating the Growth Optimal Portfolio with a Diversified World Stock Index," Research Paper Series 184, Quantitative Finance Research Centre, University of Technology, Sydney.
    4. Mirela NICHITA, 2015. "An Overview On State Of Knowledge Of Risk And Risk Management In Economics Fields," SEA - Practical Application of Science, Fundația Română pentru Inteligența Afacerii, Editorial Department, issue 7, pages 423-430, April.
    5. Eckhard Platen, 2004. "Diversified Portfolios with Jumps in a Benchmark Framework," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 11(1), pages 1-22, March.

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