Why Read It?
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An acknowledged classic in the evolution of modern finance by a Nobel Prize-winning academic.
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A practical starting point for anyone interested in the efficient management and diversification of financial portfolios.
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Introduces the concepts around portfolio management and explains them in an easily understandable way.
Getting Started
Portfolio Selection is based on the theory that investors should focus on selecting optimal portfolios as opposed to optimal assets, the first major breakthrough in the field of modern financial theory. This seminal work provides an insight into the early thinking and development of portfolio theory, and is a strong reference for individuals and financial institutions selecting optimal portfolios.
Author
Harry Markowitz (b. 1927) is Adjunct Professor of Finance at Rady School of Management. He developed his seminal theory of portfolio allocation under uncertainty in 1952, and went on to receive a PhD from the University of Chicago. He won the Nobel Prize in Economics in 1990, while a Professor of Finance at Baruch College.
Context
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Explains the theory upon which modern portfolio theory is based in an accessible manner without recourse to unnecessary mathematical terminology, and combines finance, economics, research, and computers to do so.
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Was the first book to consider risk along with return in portfolio management.
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The concepts are still used today by some of the world’s biggest financial institutions to help them optimize returns.
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It created the mathematics of portfolio selection in a model that has turned out to be the indispensable building block from which the theory of the demand for risky securities is constructed.
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Shows the investor how to protect their portfolio and maximize returns.
Impact
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Argues that risk is what drives return, rather than being a by-product of the search for higher returns.
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Describes how the portfolio should dominate its constituent assets.
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Shows that the way to minimize risk for a given level of expected return is to minimize the covariance of returns of the assets within that portfolio.
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Provided the foundation for financial economics and computational economics, and the basis for concepts such as the Capital Asset Pricing Model, Efficient Markets Hypothesis, and behavioral finance.
Quotations
“To reduce risk, it is necessary to avoid a portfolio whose securities are all highly correlated with each other.”
“To understand the general properties of large portfolios we must consider the averaging together of large numbers of highly correlated outcomes.”
“The results of a portfolio analysis are no more than the logical consequences of its information concerning securities.”
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