Practical analysis for investment professionals

Modern Portfolio Theory (MPT)


Top Five Articles from September: The Value Factor, Non-Retirement, Finance and Civilization

A defense of modern portfolio theory (MPT) by Nathan Erickson, CFA, CAIA, and Richard Stott; Nicolas Rabener's analysis of the value of factor investing; and an examination of the non-retirement phenomenon by Barbara Stewart, CFA, were among the leading posts from last month.

Raising Modern Portfolio Theory (MPT) from the Dead

C. Thomas Howard and Jason Voss, CFA, have called for the demise of modern portfolio theory (MPT) and the capital asset pricing model (CAPM). They say “financial markets should be viewed and analyzed using a behavioral lens.” Nathan Erickson, CFA, CAIA, and Richard Stott have a different opinion.

C. Thomas Howard: “View the Markets as They Are”

C. Thomas Howard, an opponent of the efficient markets hypothesis, advocates for a radical departure from the idea of diversification at the core of a healthy portfolio.

Has Goals-Based Investing Ruined Modern Portfolio Theory (MPT)?

Although a fundamentally important financial concept, modern or mean-variance portfolio theory (MPT) has been of little practical value to retail investors in their asset allocation. Hansi Mehrotra, CFA, believes it’s time to develop a more practical risk-management measure.

Has Emerging Market Debt Entered the Mainstream?

GMO's Tina Vandersteel, CFA, believes emerging market debt is attractively priced, particularly local currency debt at current relative levels. Vandersteel believes opportunities to outperform are real, especially from a bottom-up perspective, despite challenges created by declining liquidity.

What Hungry Investors Really Want from Their Financial Advisers

Investors want what Meir Statman calls “utilitarian benefits.” We know that a diversified, low-cost portfolio is theoretically best, but we'd rather have the amusement and bragging rights of expensive, risky investments like hedge funds and specialized equity managers.

Book Review: Asset Rotation

Although the author’s argument heralding the demise of modern portfolio theory (MPT) seems weak, he offers a compelling argument for active management. Using exchange-traded funds (ETFs) and asset rotation, he demonstrates how to achieve a return superior to that of a passively managed fund that relies on MPT and index funds. Asset Rotation may well be a harbinger of an “investment renaissance” and the end of passive management.

Record Low Rates and Volatility Muddle Financial Models

Alarm bells have been ringing over the summer about remarkably low levels of volatility — a key input in many common investment models — across global markets.

Is Mainstream Finance Theory Adrift?

An important new monograph from the CFA Institute Research Foundation explores a fundamental question in the wake of the global financial crisis: Has finance theory failed investors?

Are We Complacent or Petrified?

After examining his own and others' current thinking, A. Michael Lipper, CFA, believes our low level of activity in the market could indicate that we have become petrified.



By continuing to use the site, you agree to the use of cookies. more information

The cookie settings on this website are set to "allow cookies" to give you the best browsing experience possible. If you continue to use this website without changing your cookie settings or you click "Accept" below then you are consenting to this.

Close