next up previous
Next: On Portfolio Management Up: A study in portfolio Previous: A study in portfolio

Introduction

In this paper I don't assume the reader has extensive knowledge of stock markets and the portfolio selection problem. It is therefore a good idea to start with a general introduction to general portfolio theory. The seminal work developing the modern portfolio theory is credited to Harry Markowitz (see [#!Markowitz:Portfolio!#]), co-winner of the 1990 Nobel prize in economics. Markowitz's approach begins by assuming that an investor has a given sum of money to invest at the present time. At the end of the holding period (the length of time the money will be invested), the investor will sell the securities that were purchased at the beginning of the period and then either spend the proceeds on consumption or reinvest the proceeds in various securities. At the beginning the investor must make a decision on what particular securities to purchase and hold until the end of the period. Because a portfolio is a collection of securities, this decision is equivalent to selecting an optimal portfolio from a set of possible portfolios, often referred to as the portfolio selection problem. Understanding the portfolio problem as a decision problem under risk, showed to be extremely fruitful. Subsequently, Sharpe, Lintner and Mossin developed the Capital Asset Pricing Model (CAPM) which represents the core of the modern capital market theory (see [#!Firchau:Information!#]).
next up previous
Next: On Portfolio Management Up: A study in portfolio Previous: A study in portfolio
Magnus Bjornsson
1998-05-12