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Portfolio Theory as a Pattern of Timeless Moments

62 Pages Posted: 21 Apr 2013 Last revised: 29 Jan 2014

James Ming Chen

Michigan State University - College of Law

Date Written: April 20, 2013

Abstract

Quantitative finance traces its roots to modern portfolio theory. Despite the deficiencies of modern portfolio theory, mean-variance optimization nevertheless continues to form the basis for contemporary finance. The term "postmodern portfolio theory" expresses many of the theoretical advances in financial learning since the original articulation of modern portfolio theory. Any complete overview of financial risk management must address all aspects of portfolio theory, from the beautiful symmetries of modern portfolio theory to the disturbing behavioral insights and the vastly expanded mathematical arsenal of the postmodern critique. This article surveys portfolio theory, from its modern origins through more sophisticated, "postmodern" incarnations, according to the first four moments of any statistical distribution: mean, variance, skewness, and excess kurtosis. Mastery of these quantitative tools and associated behavioral insights holds the key to the efficient frontier of risk management.

Keywords: Finance, Sharpe, Treynor, portfolio theory, postmodernism, downside risk, VaR

Suggested Citation

Chen, James Ming, Portfolio Theory as a Pattern of Timeless Moments (April 20, 2013). Available at SSRN: https://ssrn.com/abstract=2254244 or http://dx.doi.org/10.2139/ssrn.2254244

James Ming Chen (Contact Author)

Michigan State University - College of Law ( email )

318 Law College Building
East Lansing, MI 48824-1300
United States

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