Abstract:
Stochastic Portfolio Theory (SPT) as a methodology aims to move away from
the e cient market hypothesis which was developed mainly as a way of explaining
the relationship between risk and returns. SPT attempts to explain
stock market behaviour using only the assumption of a logarithmic model of
stocks, which is widely used in derivative pricing and hedging. This provides
a potential tool for portfolio management and an alternative to the commonly
used mean-variance approach of Markowitz. The aim of this dissertation is to
provide an overview of the foundations of Stochastic Portfolio Theory, the consequences
for portfolio construction and behaviour and apply these concepts
to the South African Equity Market.
