Simulation of Diversified Portfolios in a Continuous Financial Market

Eckhard Platen () and Renata Rendek

No 264, Research Paper Series from Quantitative Finance Research Centre, University of Technology, Sydney

Abstract: In this paper we analyze the simulated behavior of diversified portfolios in a continuous financial market. In particular, we focus on equally weighted portfolios. We illustrate that these well diversified portfolios constitute good proxies of the growth optimal portfolio. The multi-asset market models considered include the Black-Scholes model, the Heston model, the ARCH diffusion model, the geometric Ornstein-Uhlenbeck volatility model and the multi-currency minimal market model. The choice of these models was motivated by the fact that they can be simulated almost exactly and, therefore, very accurately also over longer periods of time. Finally, we provide examples, which demonstrate the robustness of the diversification phenomenon when approximating the growth optimal portfolio of a market by an equal value weighted portfolio. Significant out performance of the market capitalization weighted portfolio by the equal value weighted portfolio can be observed for models.

Keywords: growth optimal portfolio; diversification Theorem; diversified portfolios; equally weighted portfolio; exact simulation (search for similar items in EconPapers)
Pages: 32 pages
Date: 2009-12-01
New Economics Papers: this item is included in nep-cmp
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Citations: View citations in EconPapers (5)

Published as: Platen, E. and Rendek, R., 2012, "Simulation of Diversified Portfolios in a Continuous Financial Markets", In: Stochastic Analysis and Applications to Finance: Essays in Honour of Jia-an Yan, 385-410.

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https://www.uts.edu.au/sites/default/files/qfr-archive-03/QFR-rp264.pdf (application/pdf)

Related works:
Working Paper: Simulation of Diversified Portfolios in a Continuous Financial Market (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:uts:rpaper:264

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