Abstract: This chapter briefly reviews portfolio theory as formulated by Harry Markowitz in 1952. Portfolio theory explains how to construct portfolios based on the correlation of the mean, variance, and covariance of asset returns. Mean-variance analysis not only provides a framework for selecting portfolios, it also explains how portfolio risk is reduced by diversifying a portfolio. Robust portfolio optimization builds on the idea of mean-variance optimization. The chapter provides an introduction to the advanced robust methods. It describes how to measure return and risk of a portfolio within the mean-variance framework, reduce portfolio risk through diversification, and select an optimal portfolio through mean-variance analysis. The chapter also discusses how to utilize factor models for estimating stock returns and how to apply the mean-variance model through an example. Modern portfolio theory is based on some assumptions about the market and its participants.
Publication Year: 2015
Publication Date: 2015-11-27
Language: en
Type: other
Indexed In: ['crossref']
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Cited By Count: 3
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