From Markowitz Portfolio Selection to Modern Portfolio Theory

Summary

The document sketches an early timeline for formal portfolio selection theory. It identifies Harry Markowitz’s 1952 work on mean-variance portfolio selection as a foundation of modern portfolio theory, emphasizing how diversification affects portfolio construction. It then points to Sharpe’s 1964 Capital Asset Pricing Model as a subsequent development in financial economics.

The answer also mentions Black–Litterman as a framework for combining market-based expectations with an investor’s views on expected returns, and post-modern portfolio theory as another extension. These references provide a compact set of milestones rather than a comprehensive history. The discussion gives no derivations, empirical evidence, or comparisons of assumptions and performance, so it serves as orientation to major concepts and dates, not as a guide to implementing or evaluating the models.

Key ideas

• Markowitz’s 1952 mean-variance framework formalized portfolio selection and highlighted diversification.
• Sharpe’s 1964 CAPM is presented as a later foundational development in asset pricing.
• Black–Litterman incorporates investor views about expected asset returns.
• Post-modern portfolio theory is named as another extension to classical portfolio theory.
• The timeline is selective and does not compare model assumptions or evidence.

Tags

# What was the first formal theory for asset selection/portfolio management?


# What was the first formal theory for asset selection/portfolio management?












Just curious about the timeline and evolution of asset/portfolio selection theory from past to present

## Answer by Kevin (score 3)

https://quant.stackexchange.com/a/49381

In 1952, Markowitz published „Portfolio Selection“ introducing mean variance optimal portfolios („modern portfolio theory“) into finance and emphasising the effect of diversification. This work paved the way for Sharpe (1964) (and others) to develop the CAPM which marks the foundation of financial economics. Both obviously received the Nobel Prize. Beginning from there, asset pricing has developed many theories and models.

The Black Litterman (1992) model allows for incorporating your own views with regards to the expected returns of the assets. Another extension is the post modern portfolio theory from Rom and Ferguson (1994).

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.