Abstract:
This study suggests a parsimonious stationary diffusion model for the dynamics of stock prices relative to the entire market. Its aim is to contribute to the questions how to choose the relative weights in a diversified portfolio and, in particular, whether the market portfolio behaves close to optimally in terms of the long-term growth rate.
Specifically, we introduce the elasticity bias as a measure of the market portfolio's suboptimality. We heavily rely on the observed long-term stability of the capital distribution curve, which also served as a starting point for the Stochastic Portfolio Theory in the sense of Fernholz.