In this article we will discuss about the Markowitz mean-variance analysis and its importance in portfolio management. Mean-Variance Theory: Concept of Mean Variance: Harry Markowitz is regarded as the father of modern portfolio theory. According to him, investors are mainly concerned with two properties of an asset: risk and return, but by diversification of portfolio it is possible to tradeoff [...]
Portfolio theories guide the investors to select securities that will maximize returns and minimize risk. These theories can be classified into different categories as depicted in figure 6.1. I. Traditional Approach: 1. Dow Theory: Charles Dow, the editor of Wall Street Journal, USA, presented this theory through a series of editorials. Dow formulated a hypothesis that the stock market does [...]
William Sharpe (1964) published the Capital Asset Pricing Model (CAPM): According to CAPM, return of a portfolio is equal to the sum of risk-free rate of return and a risk premium that is proportional to its beta. As per this model, risk and return are linearly associated. Ri = Rf+ βi (Rm-Rf) Where, Ri = Risk free rate of return [...]