Modern Portfolio Theory vs. Practice
A discussion of Benjamin Graham and risk.
BY Bruce Grantier | April 21, 2010
In this article, I review the modern portfolio theory (“MPT”) concept of risk and that of Benjamin Graham and other value investors. I include a discussion of human behavioural biases and conclude with some comments on the differences in the two definitions of risk This article makes reference to several key elements of MPT namely: Mean-variance analysis (“MVA”) – developed by Harry Markowitz in 1952; Capital asset pricing model (“CAPM”) – pioneered by William Sharpe in 1964; Efficient market hypothesis (“EMH”) – a result of Eugene Fama’s work in 1965
This article is not a challenge to MPT. There is already ample ongoing debate among very much more sophisticated commentators than myself, including the above-noted original authors themselves, who acknowledge MPT’s limitations and advocate broader perspectives. Click here for the full article.