The Johns Hopkins University, Department of Economics, Baltimore, MD
We provide a detailed portfolio analysis for a financial market with an atomless continuum of assets. In the context of an exact arbitrage pricing theory (EAPT), we go beyond the characterization of the existence of important portfolios (normalized riskless, mean, cost, factor and mean-variance efficient portfolios) to furnish exact portfolio compositions in terms of explicit portfolio weights. Such an analysis has not been furnished before in the context of the asymptotic arbitrage pricing theory (APT). We also characterize conditions under which a mean-variance efficient portfolio is a benchmark portfolio used in the EAPT to proxy essential risk. We illustrate our results with several examples of specific financial markets.
exact arbitrage portfolio weights well-diversified portfolio mean-variance efficient portfolio mean cost and factor portfolios Loeb measure space