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  • Essay / Modern portfolio theory and Markowitz's efficient frontier

    2. Literature Review This chapter will explore theories associated with modern portfolio theory and the Markowitz efficient frontier. The understanding and role of alternative investments and emotional assets in the financial world are also illustrated. The chapter will then conclude by analyzing the importance of alternative investments and emotional assets in a portfolio using existing academic literature.2.1 IntroductionIn portfolio optimization, investors should keep in mind that diversification is essential to balance risk and return. Malkiel (2010) reminded investors that the best investment is a well-diversified portfolio, rebalanced appropriately while adopting a buy-and-hold strategy. A reduction in portfolio volatility can be achieved by diversifying multiple securities. However, even with a large number of assets, risk cannot be reduced to zero since portfolios are affected by macroeconomic factors that influence the market (Bodie et Al., 2004). Additionally, portfolio returns can never be guaranteed because the future is unpredictable. A famous quote from a Chinese philosopher sums it up: “To know is to know that we know nothing. This is the meaning of true knowledge. » - Confucius.2.2 Modern Portfolio TheoryInvestors familiar with the saying "don't put all your eggs in one basket" can understand the logic behind Modern Portfolio Theory, pioneered by Harry Markowitz (1952). . It is one of the most important and influential economic theories in investing and finance. The theory was further developed by William Sharpe (1966) who, along with Merton Miller, was awarded the Nobel Prize in Financial Economics in 1990. Simply put, modern portfolio theory is a framework for assessing risk.... .. middle of paper ......rn similar to the risk-free rate. However, Krasker's study had many flaws and can be considered insignificant. The first real contribution was presented by Weil (1993), calculating wine revenues between the periods 1977-1992. The results suggest that returns from holding wine averaged 9.5% per year and compared unfavorably to stocks. Masset, Henderson and Weisskopf (2009) carried out the most recent analysis of wine yields from 1996 to 2009. The data was extended to 2009 to show that wine remains an attractive proposition in a period of decline. economic. Their results suggest that over a 14-year period, wine generated an average rate of return (7.3%) and low volatility (8.23%). These results showed that wine performed better than stocks. Additionally, during the 2008 financial crisis, wine prices fell 17% while most stock indices lost half their value...