Approximating the numeraire portfolio by naive diversification

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Show simple item record Platen, Eckhard en_US Rendek, Renata en_US
dc.contributor.editor en_US 2012-10-12T03:35:04Z 2012-10-12T03:35:04Z 2012 en_US
dc.identifier 2010006483 en_US
dc.identifier.citation Platen Eckhard and Rendek Renata 2012, 'Approximating the numeraire portfolio by naive diversification', Palgrave Macmillan Ltd, vol. 13, no. 1, pp. 34-50. en_US
dc.identifier.issn 1470-8272 en_US
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 numeraire 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. en_US
dc.language en_US
dc.publisher Palgrave Macmillan Ltd en_US
dc.relation.hasversion Accepted manuscript version en_US
dc.relation.isbasedon en_US
dc.rights This is a post-peer-review, pre-copyedit version of an article published in Journal of Asset Management (2012). The definitive publisher-authenticated version Journal of Asset Management (2012)13, 34–50 is available online at:
dc.title Approximating the numeraire portfolio by naive diversification en_US
dc.parent Journal of Asset Management en_US
dc.journal.volume 13 en_US
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 150200 en_US
dc.personcode 970685 en_US
dc.personcode 996174 en_US
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; growth optimal portfolio; Kelly portfolio; market capitalization-weighted index (MCI); naive diversification; numeraire portfolio en_US
dc.staffid en_US
dc.staffid 996174 en_US

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