In a seminal article on portfolio theory, Markowitz (1952) illustrated that investors are not compensated for taking on firm specific or idiosyncratic risk; however, they are compensated for taking market or systemic risk. Use your understanding of the Capital Asset Pricing Model (CAPM), statistical concepts such as standard deviation and variance, and our ideas about market efficiency and indicate whether you believe that this is a good theory. Include at least two citations that support your response.
In a seminal article on portfolio theory, Markowitz (1952) illustrated that investors are not compensated for taking on firm specific or idiosyncratic risk; however, they are compensated for taking market or systemic risk. Use your understanding of the
As per Harry Markowitz's modern portfolio theory, Markowitz provides methodology of selection of optimal portfolio out of efficient portfolio.In traditional approach investors have invested in multiple securities to get diversified for reducing risk but markowitz said it is alright to diversify but select optimal portfolio to get minimum portfolio risk.Providing lowest or minimum risk with average or highest return on portfolio is an objective of the theory.
Unlike the CAPM, the optimal portfolio as per markowitz theory is investor specific.portfolio selection cane be done by 2 stages:
(a)Getting mean-variance efficient portfolios and
(b)selecting one such portfolio
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