Harry Markowitz was the first to formalize the concept of efficient portfolio diversification in 1952. He showed quantitatively how portfolio diversification works to reduce portfolio risk for an investor. The fundamental goal of portfolio theory is to optimally allocate your investments between different assets. Portfolio theory helps people describe and solve the optimization question of a portfolio by the numbers. In other words Markowitz theory shows how the investors ought to behave.
An investor is someone who commits capital in order to gain financial return. The portfolio theory tries to reduce risk by spreading funds over several investments. In addition, it allows investors to estimate both the expected risks and returns for their investment portfolios. It is not possible to reduce the variance by investing in several securities; at the same time avoiding investing in securities with high covariance.
Portfolio theory is relevant to investors as they are able to make wise and rewarding decisions. Mathematical analysis is used to assist in relating and implying a diverse strategy for a range of assets at expected value and variance. Investors are
Modern portfolio theory proposes how rational investors will use diversification to optimize their portfolios, and how a risky asset should be priced. The basic concepts of the theory are Markowitz diversification, the efficient frontier, capital asset pricing model, the alpha and beta coefficients, the Capital Market Line and the Securities Market Line.
This theory models an asset's return as a random variable, and models a portfolio as a weighted combination of assets; the return of a portfolio is thus the weighted combination of the assets' returns. Moreover, a portfolio's return is a random ...