Business, Financing.
Analysis of modern portfolio theory - the foundation of modern portfolio theory( mpt) was introduced by harry markowitz in 195thirty - eight years later, merton miller and, harry markowitz william sharpe were awarded nobel prize for what has become a broad theory for portfolio selection. The core concept of the Portfolio Theory is based on asset diversification and directly relies on the conventional wisdom which advice to avoid putting all eggs in one basket( Papers4you. com, 2006) .
Modern portfolio theory( commonly referred as mean variance analysis) established a whole new terminology which became a norm among investment managers. (Gupta, Fabozzi, FrancisMarkowitz, Frank. 2002) It has wide application in different areas of financial management such as: asset allocation through mean variance optimization, optimal investment trust, bond portfolio immunization or manager selection, international asset allocation decisions, portfolio risk management and hedging strategies. - in its simplest form mpt provides a framework to construct efficient portfolios by selection of the investment assets, considering risk appetite of the investor. In it is essence MPT attempts to analyse how different investments are interrelated to each other. MPT employs statistical measures such as correlation and co variation to quantify the effect of the diversification on the performance of portfolio. What happens if one investment goes broke? How to minimize the negative effect of the downfall in one particular investment asset? Does it mean that all other investments will go broke as well?
According to Markowitz( 1952) investors should focus on selecting portfolios based on their overall risk - reward characteristics instead of merely compiling portfolios from securities that each individually has attractive risk - reward characteristics. - the model employs a wide range of different factors such as security returns, volatilities and correlation between asset classes for constructing efficient mean variance frontier. In a nutshell, inventors should select portfolios not individual securities. (Risk glossary) While the theory behind MPT is quite straightforward, the implementation of efficient asset allocation can become quite complicated. The frontier is considered to be efficient because every point on this frontier is a portfolio that gives the greatest possible return for certain risk level. (Gupta, 2002, et al) Since asset allocation decisions are so important, majority of the financial advisors determine optimal portfolios for their clients, both institutional and private. Surprisingly, MPT has wide implications in everyday life as well, since all of us are somehow involved into investment decisions. While the implementation of the mean variance analysis requires specific skill and knowledge, the main concepts are relatively easy and can be easily presented to the wide audience( Papers4you. com, 2006) .
Everyone has to think about securing funds for the future education or pension, investing into property or buying a new car, and allocating some money for the coming vocation. - familiarity with portfolio theory allows bringing up the ideas employed by professional investors into everyday life. How to justify these decisions, what would be the optimal solution? Reference. Portfolio selection, Journal of Finance, 7( 1) , 77 - 9 Gupta, Harry M, FrancisMarkowitz. Markowitz, Harry M. (1952) . Fabozzi, Frank J. (2002) The Legacy of Modern Portfolio Theory THE JOURNAL OF INVESTING.
Papers For You( 2006) "P/ F/ 42Benefits of international diversification" , Available from http: //www. coursework4you. co. uk/ sprtfina1htm[ 19/ 06/ 2006] Papers For You( 2006) "C/ F/ 3EQUITY PORTFOLIO MANAGEMENT: CRITICAL SUCCESS FACTORS( International Diversification, Country versus Sector Allocation) ", Available from Papers4you. com[ 19/ 06/ 2006] Risk glossary( 2006) "Modern portfolio theory" , Available from http: //www. riskglossary. com/ link/ portfolio theory. htm[ 19/ 06/ 2006] - fall 2002.
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