Postmodern Portfolio Theory – Navigating Abnormal Markets and Investor Behavior : [PDF Download]

PDF Title:Postmodern Portfolio Theory
Author:James Ming Chen
Language:English
Publisher:Palgrave Macmillan
Format:PDF
Total Page:345 Pages
PDF Size:5.09 MB
PDF Link:Read and Download

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“Portfolio theory may be the most fecund intellectual export from quantitative finance to other sciences. Social sciences outside the strictly financial domain have applied portfolio theory to subjects as diverse as regional development, social psychology, and information retrieval.

Proper understanding of portfolio theory and its place in finance and cognate sciences begins with a return to the origins of modern portfolio theory. For “the end of all our exploring/Will be to arrive where we started/And know the place for the first time.”

Modern portfolio theory offers a mathematically informed approach to financial risk management. Modern portfolio theory assumes that investors are rationally risk-averse. Given two portfolios with the same expected return, investors prefer the less risky one.

Although idiosyncratic risks are hard to identify, let alone manage, diversification reduces the systemic risk that market forces will swamp an entire portfolio of highly correlated assets.

Reward follows risk: though a riskier investment is not necessarily more rewarding, modern portfolio theory does predict that an investor will demand a higher expected return in exchange for accepting greater risk. A direct, positive relationship between risk and return is canonical to conventional theories of finance.”

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