Market Efficiency and the Growth Optimal Portfolio

Eckhard Platen () and Renata Rendek

No 386, Research Paper Series from Quantitative Finance Research Centre, University of Technology, Sydney

Abstract: The paper predicts an Efficient Market Property for the equity market, where stocks, when denominated in units of the growth optimal portfolio (GP), have zero instantaneous expected returns. Well-diversified equity portfolios are shown to approximate the GP, which explains the well-documented good performance of equally weighted portfolios. Our proposed hierarchically weighted index (HWI) is shown to be an even better proxy of the GP. It sets weights equal within industrial and geographical groupings of stocks. When using the HWI as a proxy for the GP the Efficient Market Property cannot be easily rejected and appears to be robust.

Keywords: efficient market property; growth optimal portfolio; long term growth rate; naive diversification; benchmark pricing theory; hierarchical diversification (search for similar items in EconPapers)
JEL-codes: G10 G11 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2017-08-01
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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https://www.uts.edu.au/sites/default/files/QFR-rp386.pdf (application/pdf)

Related works:
Working Paper: Market Efficiency and Growth Optimal Portfolio (2017)
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