Portfolio Theory
John Doe
Fin 4980-01
Dr. Alex
2/18/2013
Project 1: “Foundations of Portfolio Theory” by. H.M. Markowitz (1991) Foundations of Portfolio Theory by H.M. Markowitz is based on a two part lesson of microeconomics of capital markets. Part one being that taught by Markowitz, which is solely geared toward portfolio theory and how an optimizing investor would behave, whereas part two focuses on the Capital Asset Pricing Model (CAPM) which is the work done by Sharpe and Lintner. In this article Markowitz speaks strictly on portfolio theory. He states that there are three major ways in which portfolio theory differs from the theory of the firm and the theory of the consumer, which he was taught. The first way is concerned with investors; the second is concerned with economic factors that act under uncertainty. The third way is a theory where it can be directly used by large investors with adequate computer and database resources. With the first theory being pretty much self-explanatory Markowitz focuses more on expanding on the second and third theories. When speaking about uncertainty he begins to relate it to his microeconomics course where the theory of the producer assumes that the competitive firm knows the price at which it will sell the goods or items it produces before there even produced. But in reality as we know that’s not the case. Markowitz states that in reality there is a delay between the decision to produce the goods, the time of production and the time of sale. As you can conclude with this analogy the price at which was set for the goods to be sold initially can and always usually differs from the price that it sells for after it’s produced and that’s because with economic factors always shifting it provides great uncertainty for a price to be determined and placed on something that isn’t ready to be sold. With that said you shouldn’t count out uncertainty when you are trying to analyze the optimization of investor behavior. If the world was
Fin 4980-01
Dr. Alex
2/18/2013
Project 1: “Foundations of Portfolio Theory” by. H.M. Markowitz (1991) Foundations of Portfolio Theory by H.M. Markowitz is based on a two part lesson of microeconomics of capital markets. Part one being that taught by Markowitz, which is solely geared toward portfolio theory and how an optimizing investor would behave, whereas part two focuses on the Capital Asset Pricing Model (CAPM) which is the work done by Sharpe and Lintner. In this article Markowitz speaks strictly on portfolio theory. He states that there are three major ways in which portfolio theory differs from the theory of the firm and the theory of the consumer, which he was taught. The first way is concerned with investors; the second is concerned with economic factors that act under uncertainty. The third way is a theory where it can be directly used by large investors with adequate computer and database resources. With the first theory being pretty much self-explanatory Markowitz focuses more on expanding on the second and third theories. When speaking about uncertainty he begins to relate it to his microeconomics course where the theory of the producer assumes that the competitive firm knows the price at which it will sell the goods or items it produces before there even produced. But in reality as we know that’s not the case. Markowitz states that in reality there is a delay between the decision to produce the goods, the time of production and the time of sale. As you can conclude with this analogy the price at which was set for the goods to be sold initially can and always usually differs from the price that it sells for after it’s produced and that’s because with economic factors always shifting it provides great uncertainty for a price to be determined and placed on something that isn’t ready to be sold. With that said you shouldn’t count out uncertainty when you are trying to analyze the optimization of investor behavior. If the world was