Summary on Harry Markowitz Portfolio Theory 1

Summary on harry Markowitz portfolio theory Arthur: The Arthur of the portfolio theory is Harry Markowitz. Year of publication: The theory was published in March, 1952 in The Journal of Finance, Vol. 7, No. 1(Article) and later on Harry Markowitz stated it in his book in 1959 Portfolio Selection (Blackwell). Country of study: The country of study for the portfolio study was USA (Chicago) Sample: The Portfolio Theory broadly explains the relationship between risk and reward and has laid the foundation for management of portfolios as it is done today with the help of mean and variance model. It emphasizes on the significance of the relationship between securities and diversification to create optimal portfolios and reduce risk. According to this theory each single security has own risk and by diversification we can reduce the risk but generally cannot eliminate risk. During diversification we have to see the variance and correlation among the securities, showing how two securities co-vary. This is done so by choosing the quantities of various securities carefully taking mainly into consideration the way in which the price of each security varies in contrast to that of every other security in the portfolio, rather than taking securities individually. In other words, the theory uses mathematical models to build an ideal portfolio for an investor that gives maximum yield subject on his risk desire by taking into concern the relationship between risk and return.

Methods: Harry Markowitz used mathematical methods Mean and variance in portfolio selection process which is known as mean-variance model. In his book Portfolio Selection (Blackwell). In his book he said that variance does go to zero when risks are correlated. Variance can be substantial even if correlations are just .1 to .3 among securities, on average Finding: The two main conclusions we can derive from the portfolio theory are 1) Volatility is the most dangerous thing in investment in short time periods 2) Diversification reduces risk as the risk value of a diversified portfolio is less than the average risk of each of its component securities. In spite of its drawbacks, the theory is broadly used in financial risk administration and it paved the way for today’s method of value at risk measures. The theory is also used by some experts in project portfolios of nonfinancial instruments. In 1970 this theory was used in the field of “regional sciences” to derive the relationship b/w economic growth and variability. The theory has also been utilized to replicate the uncertainty and relationship between documents in information retrieval.