Approximating the numéraire portfolio by naive diversification

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Show simple item record Platen, E Rendek, R 2012-10-12T03:35:04Z 2012-02
dc.identifier.citation Journal of Asset Management, 2012, 13 (1), pp. 34 - 50
dc.identifier.issn 1470-8272
dc.identifier.other C1 en_US
dc.description.abstract Estimation theory has shown, owing to the limited estimation window available for real asset data, that the sample-based Markowitz mean-variance approach produces unreliable weights that fluctuate substantially over time. This article proposes an alternate approach to portfolio optimization, being the use of naive diversification to approximate the numéraire portfolio (NP). The NP is the strictly positive portfolio that, when used as benchmark, makes all benchmarked non-negative portfolios either mean decreasing or trendless. Furthermore, it maximizes expected logarithmic utility and outperforms any other strictly positive portfolio in the long run. The article proves for a well-securitized market that the naive equal value-weighted portfolio converges to the NP when the number of constituents tends to infinity. This result is model independent and, therefore, very robust. The systematic construction of diversified stock indices by naive diversification from real data is demonstrated. Even when taking transaction costs into account, these indices significantly outperform the corresponding market capitalization- weighted indices in the long run, indicating empirically their asymptotic proximity to the NP. Finally, in the time of financial crisis, a large equi-weighted fund carrying the investments of major pension funds and insurance companies would provide important liquidity. It would not only dampen the drawdown of a crisis, but would also moderate the excesses of an asset price bubble. © 2012 Macmillan Publishers Ltd.
dc.language eng
dc.relation.hasversion Accepted manuscript version en_US
dc.relation.isbasedon 10.1057/jam.2011.36
dc.title Approximating the numéraire portfolio by naive diversification
dc.type Journal Article
dc.parent Journal of Asset Management
dc.journal.volume 1
dc.journal.volume 13
dc.journal.number 1 en_US
dc.publocation London, UK en_US
dc.identifier.startpage 34 en_US
dc.identifier.endpage 50 en_US BUS.School of Finance and Economics en_US
dc.conference Verified OK en_US
dc.for 1502 Banking, Finance and Investment
dc.personcode 970685
dc.personcode 996174
dc.percentage 100 en_US Banking, Finance and Investment en_US
dc.classification.type FOR-08 en_US
dc.edition en_US
dc.custom en_US en_US
dc.location.activity en_US
dc.description.keywords equi-weighted index
dc.description.keywords growth optimal portfolio
dc.description.keywords Kelly portfolio
dc.description.keywords market capitalization-weighted index (MCI)
dc.description.keywords naive diversification
dc.description.keywords numéraire portfolio
pubs.embargo.period Not known
pubs.organisational-group /University of Technology Sydney
pubs.organisational-group /University of Technology Sydney/Faculty of Business
pubs.organisational-group /University of Technology Sydney/Faculty of Business/Finance
pubs.organisational-group /University of Technology Sydney/Faculty of Science
pubs.organisational-group /University of Technology Sydney/Strength - Quantitative Finance
utslib.copyright.status Open Access 2015-04-15 12:23:47.074767+10
pubs.consider-herdc true
utslib.collection.history General (ID: 2)
utslib.collection.history School of Mathematical Sciences (ID: 340)

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