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Summary on harry Markowitz portfolio theory

The Arthur of the portfolio theory is Harry Markowitz.
Year of publication:
The theory was published in March, 1952 in The Journal of Finance,
Vol. 7, No. 1(Article) and later on Harry Markowitz stated it in his book
in 1959 Portfolio Selection (Blackwell).
Country of study:
The country of study for the portfolio study was USA (Chicago)
The Portfolio Theory broadly explains the relationship between risk and
reward and has laid the foundation for management of portfolios as it is
done today with the help of mean and variance model. It emphasizes on
the significance of the relationship between securities and diversification
to create optimal portfolios and reduce risk. According to this theory
each single security has own risk and by diversification we can reduce
the risk but generally cannot eliminate risk.
During diversification we have to see the variance and correlation
among the securities, showing how two securities co-vary. This is done
so by choosing the quantities of various securities carefully taking
mainly into consideration the way in which the price of each security
varies in contrast to that of every other security in the portfolio, rather
than taking securities individually. In other words, the theory uses
mathematical models to build an ideal portfolio for an investor that gives
maximum yield subject on his risk desire by taking into concern the
relationship between risk and return.

Harry Markowitz used mathematical methods Mean and variance in
portfolio selection process which is known as mean-variance model. In
his book Portfolio Selection (Blackwell). In his book he said that
variance does go to zero when risks are correlated. Variance can be
substantial even if correlations are just .1 to .3 among securities, on
The two main conclusions we can derive from the portfolio theory are
1) Volatility is the most dangerous thing in investment in short time
2) Diversification reduces risk as the risk value of a diversified portfolio
is less than the average risk of each of its component securities.
In spite of its drawbacks, the theory is broadly used in financial risk
administration and it paved the way for todays method of value at risk
The theory is also used by some experts in project portfolios of non-
financial instruments. In 1970 this theory was used in the field of
regional sciences to derive the relationship b/w economic growth and
The theory has also been utilized to replicate the uncertainty and
relationship between documents in information retrieval.