Classical portfolio theory (as developed by Markowitz and refined by Sharpe, Merton, etc.) does not provide a satisfactory explanation for various phenomena relating to the structure and behaviour of equity markets. Stochastic portfolio theory, a significant new development in mathematical finance, can be used to explain many such phenomena. For example, the theory explains the so-called "size effect": smaller-capitalization (small-cap) stocks tend to generate higher long-term returns than large-cap stocks. Another surprising consequence of the theory is that one can prove the existence of arbitrage under the very weak assumption that the market is not dominated on average over time by single stocks.

Slides from the talk, but without the diagrams, are available as

1. PDF: SPTtalk1.pdf
2. Postscript: SPTtalk1.ps

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Please feel free to bring this to the attention of interested colleagues.