This paper introduces a framework for choosing portfolios by balancing expected return against variance rather than simply maximizing returns. Markowitz argues that diversification works because correlations matter, showing that investors should consider how securities behave together rather than merely accumulating more holdings.
Portfolio Selection
Harry Markowitz
Research
16 Pages
Key Takeaways
Returns Are Not Enough: In the model, maximizing expected return alone can result in allocating 100% of capital to the single highest return security.
Diversification Needs Variety: Markowitz argues that holding 60 railway securities can provide less diversification than spreading investments across several economically different industries.
Efficiency Balances Tradeoffs: For 3 and 4 security examples, efficient portfolios range from minimum variance to maximum expected return based on investor preferences.
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