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Portfolio Selection

In 1952, an economist named Harry Markowitz wrote his dissertation on “Portfolio Selection”, a paper that contained theories which transformed the landscape of portfolio management—a paper which would earn him the Nobel Prize in Economics nearly four decades later. As the philosophical antithesis of traditional stock selection, his Modern Portfolio Theory (MPT) continues to be a popular investment strategy, and this portfolio management tool—if used correctly—can result in a diverse, profitable investment portfolio. Instead of focusing on the risk of each individual asset, Markowitz demonstrated that a diversified portfolio is less volatile than the total sum of its individual parts. While each asset itself might be quite volatile, the volatility of the entire portfolio can actually be quite low. More than 70 years after its introduction, the fundamentals of MPT ring true. Let’s delve into this popular portfolio management strategy and discover what makes the principles of this revolutionary theory so effective.

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