Approximating the growth optimal portfolio with a diversified world stock index

Abstract

Purpose This paper aims to construct and compare various total‐return world stock indices based on daily data. Design/methodology/approach Because of diversification, these indices are noticeably similar. A diversification theorem identifies any diversified portfolio as a proxy for the growth optimal portfolio. Findings The paper constructs a diversified world stock index that outperforms a number of other indices and argues that it is a good proxy for the growth optimal portfolio. Originality/value The diversified world stock index has applications to derivative pricing and investment management.

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