Dismissing the critics of modern portfolio theory

PORTFOLIO THEORY

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Modern portfolio theory may have its critics. But the discipline of a systematic mathematical approach to portfolio construction should result in consistent above-benchmark returns, writes Sean Phayre, head of quantitative investments at SWIP.

Early in my career as a quantitative analyst in a traditional stock-picking investment company, I was told two things: 1. First-quartile equity fund performance is often closely followed by fourth-quartile performance. 2. Modern portfolio theory (MPT), pioneered by Harry Markowitz in the early 1950s, is supposed to yield efficient and well-constructed portfolios. But it does not work, because markets are inefficient. Observing equity portfolio performance day to day at close quarters, it is easy to agree with the first of these notions. Excellent short-term performance may be ...

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