Who is 'Harry Markowitz'

Harry Markowitz (1927- ) is a Nobel Prize winning economist who devised the modern portfolio theory, introduced to academic circles in his article, "Portfolio Selection," which appeared in the Journal of Finance in 1952. Markowitz's theories emphasized the importance of portfolios, risk, the correlations between securities and diversification. His work, in collaboration with Merton H. Miller and William F. Sharpe, changed the way that people invested. These three intellectuals shared the 1990 Nobel Prize in Economics. Markowitz is currently a professor at the Rady School of Management of the University of California at San Diego.

BREAKING DOWN 'Harry Markowitz'

In his own words, Harry Markowitz said, "the basic concepts of portfolio theory came to me one afternoon in the library while reading John Burr Williams's Theory of Investment Value. Williams proposed that the value of a stock should equal the present value of its future dividends. Since future dividends are uncertain, I interpreted Williams's proposal to be to value a stock by its expected dividends. But if the investor were only interested in expected values of securities, he or she would only be interested in the expected value of the portfolio; and to maximize the expected value of a portfolio one need invest only in a single security." (source: Nobel Prize official website)

Investing in a "single security" did not make sense to Markowitz. Thus, Markowitz embarked on developing the modern portfolio theory with the foundation of diversification underpinned by concepts of risk, return, variance and covariance. Markowitz explains: "Since there were two criteria, risk and return, it was natural to assume that investors selected from the set of Pareto optimal risk-return combinations." Known as the Markowitz efficient set, the optimal risk-return combination of a portfolio lies on an efficient frontier of maximum returns for a given level of risk based on mean-variance portfolio construction. The theory of mean-variance portfolios that Markowitz revolutionized eventually extended to the development of capital asset pricing model, a vital component of investment management practice.

RELATED TERMS
  1. Markowitz Efficient Set

    The Markowitz efficient set is a portfolio with returns that ...
  2. William F. Sharpe

    An American economist who won the 1990 Nobel Prize in Economics, ...
  3. Mutual Fund Theorem

    The mutual fund theorem is an investing theory suggesting the ...
  4. Merton Miller

    Merton Miller was a noted economist who received the Nobel Prize ...
  5. Efficient Frontier

    A set of optimal portfolios that offers the highest expected ...
  6. John R. Hicks

    A British economist who received the 1972 Nobel Memorial Prize ...
Related Articles
  1. Investing

    Diversification: The Oldest Investing Trick in the Book

    Diversification is just as relevant to your investments now as it was 400 years ago.
  2. Managing Wealth

    Manage Investments And Modern Portfolio Theory

    Modern Portfolio Theory suggests a static allocation which could be detrimental in declining markets, making it necessary for continuous risk assessment. Downside risk protection may not be the ...
  3. Insights

    Where Does the Nobel Prize Money Come From?

    The cash award associated with the Nobel Prize has changed in value considerably since the first awards in 1901. How does the Nobel Foundation invest its money?
  4. Investing

    Seven Controversial Investing Theories

    Find out information about seven controversial investing theories that attempt to explain and influence the market as well as the actions of investors.
  5. Investing

    Taking Shots at CAPM

    Find out why many investors think the capital asset pricing model is full of holes.
  6. Investing

    Explaining The Efficient Frontier

    Most investment choices involve a tradeoff between risk and reward. The "Efficient Frontier" is a modern portfolio theory tool that shows investors the best possible return they can expect from ...
  7. Investing

    Understanding The Sharpe Ratio

    The Sharpe ratio describes how much excess return you are receiving for the extra volatility that you endure for holding a riskier asset.
  8. Financial Advisor

    Harris Associates: Investment Manager Highlight

    Take a look at the executive management and investment professionals team that leads the private investment firm of Harris Associates.
RELATED FAQS
  1. How do investment advisors calculate how much diversification their portfolios need?

    Learn how modern portfolio theory (MPT) can help determine a diversified mix of assets for inclusion in a portfolio that ... Read Answer >>
  2. What is a permanent portfolio?

    A permanent portfolio is a portfolio construction theory devised by free-market investment analyst Harry Browne in the 198 ... Read Answer >>
  3. Is there a positive correlation between risk and return?

    Learn about the positive correlation between risk and the potential for return, and understand how risk is used to construct ... Read Answer >>
  4. What's the difference between agency theory and stakeholder theory?

    Learn how agency theory and stakeholder theory are used in business to understand common business communication problems ... Read Answer >>
  5. What is the chaos theory?

    The chaos theory is a complicated and disputed mathematical theory that seeks to explain the effect of seemingly insignificant ... Read Answer >>
Hot Definitions
  1. Price-Earnings Ratio - P/E Ratio

    The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing a company that measures its current share price relative ...
  2. Internal Rate of Return - IRR

    Internal Rate of Return (IRR) is a metric used in capital budgeting to estimate the profitability of potential investments.
  3. Limit Order

    An order placed with a brokerage to buy or sell a set number of shares at a specified price or better.
  4. Current Ratio

    The current ratio is a liquidity ratio that measures a company's ability to pay short-term and long-term obligations.
  5. Return on Investment (ROI)

    Return on Investment (ROI) is a performance measure used to evaluate the efficiency of an investment or compare the efficiency ...
  6. Interest Coverage Ratio

    The interest coverage ratio is a debt ratio and profitability ratio used to determine how easily a company can pay interest ...
Trading Center