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Khan, M. Ali
Sun, Yeneng
Year of Publication: 
Series/Report no.: 
Working Papers, The Johns Hopkins University, Department of Economics 483
For market with an atomless continuum of assets, we formulate the intuitive idea of a well-diversified portfolio, and present a notion of exact arbitrage, strictly weaker than the more conventional notion of asymptotic arbitrage, and necessary and sufficient for the validity of an APT pricing formula. One formula involves essential risk based on a specific index portfolio constructed from factors and factor loadings that are endogenously extracted to satisfy an optimality property involving a finite number of factors. We illustrate how our results can be translated to markets with a large but finite number of assets.
exact arbitrage
asymptotic arbitrage
exact law of large numbers
well-diversified portfolio
essential risk
arbitrage pricing theory
Loeb measure space.
Document Type: 
Working Paper

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