We develop a model of portfolio choice to nest the views of Keynes, who advocates concentration in a few familiar assets, and Markowitz, who advocates diversification. We use the concepts of ...ambiguity and ambiguity aversion to formalize the idea of an investor's "familiarity" toward assets. The model shows that for any given level of expected returns, the optimal portfolio depends on two quantities: relative ambiguity across assets and the standard deviation of the expected return estimate for each asset. If both quantities are low, then the optimal portfolio consists of a mix of familiar and unfamiliar assets; moreover, an increase in correlation between assets causes an investor to increase concentration in familiar assets (flight to familiarity). Alternatively, if both quantities are high, then the optimal portfolio contains only the familiar asset(s), as Keynes would have advocated. In the extreme case in which both quantities are very high, no risky asset is held (nonparticipation).
This paper was accepted by Brad Barber, Teck Ho, and Terrance Odean, special issue editors.
Harry M. Markowitz
Production and operations management,
03/2009, Letnik:
18, Številka:
2
Journal Article
Recenzirano
Harry M. Markowitz (born Aug 24, 1927) received his bachelor's and master's degrees from the University of Chicago in 1947 and 1950, respectively. Also there in 1954, he received his PhD in economic ...with a thesis on the portfolio theory. Markowitz's research focus has always been on the application of mathematical or computer techniques to practical problems, particularly problems of business decisions under uncertainty. In 1989, Markowitz received the John von Neumann Theory Prize in Operations Research given by ORSA/TIMS (now INFORMS) for his ground-breaking work in portfolio selection, mathematical programming, and simulation. Markowitz is best known for his pioneering work in Modern Portfolio Theory, studying the effects of asset risk, correlation and diversification on expected investment portfolio returns, which first appeared in his seminal 1952 Journal of Finance paper titled "Portfolio Selection".
Three "Practical" Economists Share Nobel Pool, Robert
Science (American Association for the Advancement of Science),
1990-Oct-26, Letnik:
250, Številka:
4980
Journal Article
Recenzirano
The 1990 Nobel Prize in Economic Sciences has been awarded to Harry Markowitz, Merton Miller and William Sharpe. Their achievements are discussed.
