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Market Efficiency and the Growth Optimal Portfolio

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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.

Suggested Citation

  • Eckhard Platen & Renata Rendek, 2017. "Market Efficiency and the Growth Optimal Portfolio," Research Paper Series 386, Quantitative Finance Research Centre, University of Technology, Sydney.
    • Handle: RePEc:uts:rpaper:386
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    File URL: https://www.uts.edu.au/sites/default/files/QFR-rp386.pdf
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    Cited by:

    1. Dietmar P.J. Leisen & Eckhard Platen, 2017. "Investing for the Long Run," Research Paper Series 381, Quantitative Finance Research Centre, University of Technology, Sydney.
    2. Kevin Fergusson & Eckhard Platen, 2017. "Less-Expensive Valuation of Long Term Annuities Linked to Mortality, Cash and Equity," Papers 1711.02808, arXiv.org.

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    More about this item

    Keywords

    efficient market property; growth optimal portfolio; long term growth rate; naive diversification; benchmark pricing theory; hierarchical diversification;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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