Harry M. Markowitz is one of the most distinguished economists of the twentieth century and has contributed a lot to economics. He is one of the Nobel Laureates of the year 1990 who propounded theories for assessing the risk involved in the stock markets and the returns on corporate bonds and stocks. This theory is known as the Modern Portfolio Theory. The Nobel winning economist is presently employed at the Rady School of Management at the university of California.
Life and Work of Markowitz
Harry Markowitz took birth in Chicago on 24 August 1927 into the family of Morris and Mildred Markowitz. Initially he had an interest in physics and philosophy and completed his graduation from the University of Chicago. But when he decided to pursue his masters he took up economics since he had developed an interest is economics in the later stages of his education. He did his specialization in economics under the supervision of eminent economists, which include names like, Milton Friedman, Tjalling Koopmans, Leonard Savage and Jacob Marschak. He accepted the membership of the Cowles Commission while still being a student at the University.
Markowitz for his dissertation decided to develop a paper applying mathematical calculation to analyze the stock market. His instructor Jacob Marschak encouraged him to develop a thesis on this topic. While doing the research work on the theory he realized that the stock prices were calculated basing on the model of Present Value of John Burr Williams and that the model had many loopholes and it excluded any comprehensive explanation of the impacts of risk in the market. As a consequence came into existence a detailed research work in the form of a seminal paper. This was later named as the Theory of Portfolio allocation under Uncertainty. The Journal of Finance published the theory in 1952.
Markowitz joined the RAND Corporation in 1952. There he met George Dantzig and with his assistance Markowitz began his research work on the optimization techniques. He developed the critical line algorithm for recognizing the optimal mean-variance portfolios. This later came to be known as the Markowitz frontier. He submitted his dissertation on the portfolio theory and obtained his doctorate degree in 1955 from the University of Chicago. After this he spent one year from 1955-56 at the Yale University. He is presently associated with the California based investment management firm known as Research Affiliates in the advisory panel of Robert D. Arnott’s Pasadena.
According to the Markowitz Efficient Portfolio there is an added diversification cannot lower the risk of the portfolio for a given expectation of return. The Markowitz Efficient Frontier is the collection of all portfolios, which are expected to give high return at the lowest risk. These concepts of efficiency were instrumental in developing the Capital Asset Pricing Model.
Major works of Markowitz
Markowitz has written several books in his entire life. Some of them are:
- The Utility of Wealth
- Portfolio Selection
- Social Welfare Functions Based on Individual Rankings
- Foundations of Portfolio Theory
Books by Harry M. Markowitz
- Portfolio Selection: Efficient Diversification of Investments
- The Founders of Modern Finance: Their Prize-Winning Concepts and 1990 Nobel Lectures
- Harry Markowitz: Selected Works (Nobel Laureate)
- Mean-Variance Analysis in Portfolio Choice and Capital Markets
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