Portfolio Theory and Investment Analysis

This book evaluates the origins of Modern Portfolio Theory (MPT) as a guide for further study. Based on the pioneering work of Harry Markowitz and John Tobin we learn how anybody with today’s software and a reasonable financial education can model risky investment portfolios. But one lesson from the 2007 banking and 2010 euro crises is that computer driven models can be so complex that investors may not interpret their results correctly. Returning to first principles, we therefore explain why MPT is only a guide to action and program trading is no substitute for human judgement. Investors should always understand the models that underpin their analyses.

1. An Overview Introduction

1.1 The Development of Finance
1.2 Efficient Capital Markets
1.3 The Role of Mean-Variance Efficiency
1.4 The Background to Modern Portfolio Theory
Summary and Conclusions
Review Activity
Selected References

2. Risk and Portfolio Analysis
Introduction
2.1 Mean-Variance Analyses: Markowitz Efficiency
2.2 The Combined Risk of Two Investments
2.3 The Correlation between Two Investments
Review Activity
Summary and Conclusions
Selected References

3. The Optimum Portfolio
Introduction
3.1 The Mathematics of Portfolio Risk
3.2 Risk Minimisation and the Two-Asset Portfolio
3.3 The Minimum Variance of a Two-Asset Portfolio
3.4 The Multi-Asset Portfolio
3.5 The Optimum Portfolio
Review Activity
Summary and Conclusions
Selected References

4. The Market Portfolio
Introduction
4.1 The Market Portfolio and Tobin’s Theorem
4.2 The CML and Quantitative Analyses
4.3 Systematic and Unsystematic Risk
Summary and Conclusions
Review Activity
Selected References

Appendix

With an eclectic record of University teaching, research, publication, consultancy and curricula development, underpinned by running a successful business, Alan has been a member of national academic validation bodies and held senior external examinerships and lectureships at both undergraduate and postgraduate level in the UK and abroad.

With increasing demand for global e-learning, his attention is now focussed on the free provision of a financial textbook series, underpinned by a critique of contemporary capital market theory in volatile markets, published by bookboon.com.

To contact Alan, please visit Robert Alan Hill at www.linkedin.com.