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Approximating the Growth Optimal Portfolio with a Diversified World Stock Index

This paper constructs and compares various total return world stock indices based on daily data. Due to diversification these indices are noticeably similar. A diversification theorem identifies any diversified portfolio as a proxy for the growth optimal portfolio. The paper constructs a diversified world stock index that outperforms a number of other indices and argues that it is a good proxy for the growth optimal portfolio. This has applications to derivative pricing and investment management.

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Paper provided by Quantitative Finance Research Centre, University of Technology, Sydney in its series Research Paper Series with number 180.

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Length: 23 pages
Date of creation: 01 Aug 2006
Date of revision:
Publication status: Published as: Le, T. and Platen, E, 2006, "Approximating the Growth Optimal Portfolio with a Diversified World Stock Index", The Journal of Risk Finance, 7(5), 559-574.
Handle: RePEc:uts:rpaper:180
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  1. Eckhard Platen, 2001. "Arbitrage in Continuous Complete Markets," Research Paper Series 72, Quantitative Finance Research Centre, University of Technology, Sydney.
  2. Long, John Jr., 1990. "The numeraire portfolio," Journal of Financial Economics, Elsevier, vol. 26(1), pages 29-69, July.
  3. Eckhard Platen, 2004. "Diversified Portfolios with Jumps in a Benchmark Framework," Asia-Pacific Financial Markets, Springer, vol. 11(1), pages 1-22, March.
  4. Kevin Fergusson & Eckhard Platen, 2005. "On the Distributional Characterization of Log-returns of a World Stock Index," Research Paper Series 153, Quantitative Finance Research Centre, University of Technology, Sydney.
  5. Eckhard Platen, 2006. "A Benchmark Approach To Finance," Mathematical Finance, Wiley Blackwell, vol. 16(1), pages 131-151.
  6. Norbert Hofmann & Eckhard Platen, 2000. "Approximating Large Diversified Portfolios," Mathematical Finance, Wiley Blackwell, vol. 10(1), pages 77-88.
  7. 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.
  8. 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.
  9. Luenberger, David G., 1997. "Investment Science," OUP Catalogue, Oxford University Press, number 9780195108095, July.
  10. Eckhard Platen, 2005. "On The Role Of The Growth Optimal Portfolio In Finance," Australian Economic Papers, Wiley Blackwell, vol. 44(4), pages 365-388, December.
  11. Angel Pardo & Roberto Pascual, 2012. "On the hidden side of liquidity," The European Journal of Finance, Taylor & Francis Journals, vol. 18(10), pages 949-967, November.
  12. Jorion, Philippe, 1986. "Bayes-Stein Estimation for Portfolio Analysis," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 21(03), pages 279-292, September.
  13. Eckhard Platen, 2004. "Capital Asset Pricing for Markets with Intensity Based Jumps," Research Paper Series 143, Quantitative Finance Research Centre, University of Technology, Sydney.
  14. Markowitz, Harry M, 1976. "Investment for the Long Run: New Evidence for an Old Rule," Journal of Finance, American Finance Association, vol. 31(5), pages 1273-86, December.
  15. Aitken, Michael J. & Berkman, Henk & Mak, Derek, 2001. "The use of undisclosed limit orders on the Australian Stock Exchange," Journal of Banking & Finance, Elsevier, vol. 25(8), pages 1589-1603, August.
  16. repec:uts:rpaper:144 is not listed on IDEAS
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