20: Modern Portfolio Theory and Quantum Mechanics

The year 2002 marks the 50th anniversary of the publication of Harry Markowitz’ seminal paper on mean variance optimization, a then-obscure event which nonetheless inaugurated what we now know as modern portfolio theory (MPT). Over the following five decades, Markowitz and his followers have contributed enormously to our understanding of the behavior of capital markets and of the nature of risk and its relationship to investment returns. MPT has, in a broad way, allowed us to model how markets are likely to behave over very long periods of time, and has therefore allowed us to base the design of investment portfolios on principles that are at least in some fundamental way related to likely market behavior. For investors born after MPT concepts were incorporated into real-world investment portfolios, it’s hard to believe what a revolutionary change MPT has occasioned.

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