Markowitz Diversification

©2002 OS Financial Trading System

Harry Markowitz won the Nobel prize for his contributions to portfolio theory. His research provided the conceptual foundation for another Nobel winning contribution, the Capital Asset Pricing Model. However, in terms of influencing practitioners Markowitz diversification is not widely used. One reason is possibly due to the significant differences between identifying portfolios that are efficient ex post (i.e., using realized returns) versus identifying portfolios that are efficient ex ante (i.e., in an expected sense). Practitioners and investors are interested in the latter. Part of the problem is the inability of traditional Markowitz diversification techniques to incorporate dynamic risk and return behavior. The objective of this lesson is to understand these issues plus learn how to adjust for these weaknesses when applying Markowitz diversification to a set of real world stocks that exhibit dynamic risk and return behavior. 

Lesson Plan

Launching FTS Portfolio Returns and Efficient Portfolios Module

How do I get data into the the FTS Portfolio Returns and Efficient Portfolios Module?

This step includes the spreadsheet containing the data for this lesson.

How do I analyze the behavior of returns?

How can I build an efficient portfolio?

How can I assess portfolio performance using backtesting experiments?

Problem Set