Modern Portfolio Theory

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Recommended: Risk analysis in investment decisions

Dr. Harry Markowitz was the establisher of Portfolio selection, he won a share of the 1990 Nobel Prize for his research of "Financial Economics". Dr. Harry Markowitz invested the Portfolio selection and released it in 1959, which was the fundamental stage of Modern Portfolio Theory. According to Dr. Harry Markowitz and his Portfolio selection the process of selecting a portfolio can be divided to two levels. The first level begins with the investigation and proof of the future progress of available assets. The second level begins with the relative believes for the future progress of the available assets and ends by choosing the portfolio. In order to choose the portfolio there are rules an investor have to follow. One of the rules is the one that the investor would have the maximum future expected gains of his capitalized asset value.

Portfolio Theory can be used by economic agents who act under uncertain situations. That flow from the fact that in real market world there is nothing certain. One verified example is in manufacturing environment where there is gab of time between the producing decision, the production process and the sale of the product, which bring us to the conclusion that sale price is uncertain in the beginning of the process. Institutional investors can use this theory.

Portfolio Theory has six basic principles according to Dr. Harry Markowitz. The first one state that investors are not willing to have risk on their portfolio and the only risk they accept is the one that balance with their returns. The second principle states that market prices are satisfied and logical. The third principle states that the portfolio must be distributed as a whole security selection. The forth principle states that ...

... middle of paper ...

...n began with the right strategy. Some managers have more valid information than others. If managers follow the correct strategy the investments would have the right performance. Modern portfolio theory was not the reason of the recession on 2008 – 2009. The reason of the recession was the bad manage of Modern portfolio theory from managers.

Works Cited

http://www.simonemariotti.com/downloads/Papers%20finanziari/Fabozzi-Gupta-Mar.pdf

http://pages.stern.nyu.edu/~eelton/papers/97-dec.pdf

http://www.e-m-h.org/Mark91.pdf

http://www.isectors.com/pdf/article_Principals%20of%20Modern%20Portfolio%20Theory%20Continue%20to%20Inspire.pdf

http://www.iiis.org/CDs2010/CD2010IMC/ICEME_2010/PapersPdf/FB583RP.pdf

http://www.onwallstreet.com/ows_issues/2010_5/in-defense-of-modern-portfolio-theory-2666592-1.html

http://monevator.com/2009/02/26/portfolio-diversification/

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