Exact arbitrage and portfolio analysis in large asset markets (Q1411091)

The paper makes a portfolio analysis for financial markets with an atom-less continuum of assets. The tools used are a no asymptotic (exact) arbitrage and the law of large number. The first approach considers the markets with countable many financial assets. It defines a well-diversified portfolio as the limit, in the Hilbert space norm, of the returns of a sequence of finite portfolios. Under the assumption of a no asymptotic arbitrage, it can be applied to markets with an asset index set of an arbitrary infinite cardinality. The major focus is on the second approach which considers markets with a continuum of assets under a special measure-theoretic structure. Both approaches formalize the cancellation of the idiosyncratic risk and derive an asset pricing formula under the assumption of no asymptotic and exact arbitrage respectively. The paper also discusses the necessary and sufficient conditions for the existence of a normalized risk-less portfolio, factor portfolios, a mean portfolio, a cost portfolio. Finally, it provides an analysis of the mean-variance efficient portfolios and it furnishes an explicit formulae for computing the maximal Sharpe measure, namely the maximal risk and return trade-off measure.