Many people believe that modern finance began in 1952 when Harry Markowitz published his paper, “Portfolio Selection,” for which he was later awarded the Nobel Prize. His work lays out the mathematical basis for diversification. By combining uncorrelated securities, investors can reduce the riskiness of their portfolios without lowering returns.
But Markowitz had a problem. When he sat before his dissertation committee to defend his thesis, they didn’t know how to classify his work. “It’s not economics,” they objected. “It’s not mathematics. It’s not business. It’s not literature.” Eventually, the committee agreed that Markowitz had earned his doctorate. And the world is a richer place.
But what is portfolio management? It uses all these disciplines, but isn’t really part of them. In my assessment, it’s most like engineering. Portfolio managers need to find the most best way to reach a goal, given a set of constraints, working in a world of uncertain, partial information. more
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