History of Portfolio Theory

According to the Harry M. Markowitz Portfolio means

diversification. If we think at Financial managers ground
Theory of Portfolio understand us the diversification of
investment, where opportunity is available. This theory also
help us to know about the risk.

This theory is established in 1952 and Harry M. Markowitz

develop the theory and also established the theory.

Harry M. Markowitz is the father of the modern portfolio

theory

History of Portfolio Theory &

Investment Management
Breakthroughs
1952
Diversification and Portfolio Risk
Harry Markowitz
Markowtiz conduct landmark research, concluding that
diversification reduces risk. He redefines the concept of
portfolio risk versus risk.

1972
Options Pricing Model
Fisher Black, University of Chicago
The development of the option pricing model allows new ways
to segment, quantify and manage risk. It spurs the
development of a market for alternative investment.
1973
Random Prices and Practical Investing
Rex Sinquenfield, American National Bank, 1973
we see the birth of index funds as the banks develop the first
passive S & P 500index funds.

Portfolio Management and

Portfolio Theory
Portfolio theory is an investment approach developed by
University of Chicago economist Harry M. Markowitz.
There are two Types of Portfolio Strategies. They are:
1. Passive Portfolio Strategies
2. Active Portfolio Strategies.

Portfolio Management
Portfolio:
Portfolio refers to invest in a group of securities rather to
invest in a single security.

Portfolio Management:
1.Portfolio management is the process of creation and
maintenance of investment portfolio
2. This is a complex process which tries to make investment
activity , more rewarding and less risky.

Major task involved with

Portfolio Management
1. Taking decisions about investment mix and policy.
2. Matching investment to objectives.
3. Asset allocation for individuals and institution.
4. Balancing risk against performance.

Phases of Portfolio Management

Five phases can be identified in the process. They are:
1. Security analysis
2. Portfolio analysis
3. Portfolio Selection
4. Portfolio revision
5. Portfolio evaluation

1. Security analysis
Security analysis is the initial phases of the
portfolio management process. There are many types of
securities available in the market including equity shears,
preference shears, debenture and bonds.

2. Portfolio analysis
A portfolio

refers to a group of securities that are kept

together as an investment.
By selecting the different sets of securities and varying the
amount of investments in each security, various portfolio are
designed. It involves the mathematically calculation of return
and risk of each portfolio

3. Portfolio Selection
During these portfolio is selected on the basis of input
from previous phase Portfolio Analysis. The main target of the
portfolio selection is to build a portfolio that offer highest
returns at a given risk.
The optimal portfolio is determined in an objective and
disciplined way by using the analytical tools and conceptual
way framework provided by Markowitzs portfolio theory .

4. Portfolio revision
After selecting the optimal portfolio,
investors is required to monitor it constantly to ensure that the
portfolio remains optimal with passage of time.
As a result of portfolio revision the mix and proportion of
security in the portfolio changes.

5. Portfolio evaluation
This phase involves the regular analysis and
assessment of the portfolio performance in terms of risk and
returns over a period of time
Moreover this procedure assists in identifying the weaknesses in
the investment processes.

Correlation
Correlation can be easily understood as co
relation. To define correlation is the average relationship
between relationship two or more variables.
Event correlation and simple event correlation are the types of
correlations mainly used in the industry point of view.

Types of Correlation
There are six types of correlation. They are:
1. Positive Correlation
2. Negative Correlation
3. Perfectly positive Correlation
4. Perfectly negative Correlation
5. Zero Correlation
6. Linear Correlation

Linear Correlation
A statistical measure that attempts to determine the strength of
the relationship between one dependent variable and a series
of other changing variables

Types of Regression
The two basic type of regression. They are
1. Linear Regression
2. Multiple Regression

Variance-Covariance Matrix
In statistics a variance covariance matrix
is a way of representing the relationship among a set of two or
more variables. It is a square array of numbers, with as many
rows and columns as there are variables . The variances are
written on the main diagonal from upper left to lower right and
the covariances in all other cells of the matrix.