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Approximating The Growth Optimal Portfolio And Stock Price Bubbles

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  • ECKHARD PLATEN

    (School of Mathematical and Physical Sciences and Finance Discipline Group, University of Technology Sydney, College of Business and Economics, Australian National University, Canberra, Australia2Department of Actuarial Science, University of Cape Town, South Africa)

  • RENATA RENDEK

    (Quantitative Finance Research Centre, University of Technology Sydney, Australia)

Abstract

In practice, optimal portfolio construction for large stock markets has never been conclusively resolved because estimating the required means of returns with sufficient accuracy is a highly intractable task. By avoiding estimation, this paper approximates closely the growth optimal portfolio (GP) for the stocks of developed markets with a well-diversified, hierarchically weighted index (HWI). For stocks denominated in units of the HWI, their current value turns out to be strictly greater than their future expected values, which indicates the existence of stock price bubbles that could be systematically exploited for long-term asset management. It is shown that the HWI does not leave much room for significant performance improvements as proxy for the GP.

Suggested Citation

  • Eckhard Platen & Renata Rendek, 2020. "Approximating The Growth Optimal Portfolio And Stock Price Bubbles," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 23(07), pages 1-33, November.
    • Handle: RePEc:wsi:ijtafx:v:23:y:2020:i:07:n:s021902492050048x
    DOI: 10.1142/S021902492050048X
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