The Practical Implications of Modern Portfolio Theory

21 Pages Posted: 15 Dec 2017

See all articles by Timothy Falcon Crack

Timothy Falcon Crack

University of Otago - Department of Accountancy and Finance

Robin Grieves

Rollins College - Crummer Graduate School of Business

Date Written: December 13, 2017

Abstract

The practical implications of modern portfolio theory (MPT) are obscured by more than 50 years of academic literature. We shed light on the literature by picking out the few most important implications of MPT. We argue first that what we dub the “Markowitz uncertainty principle” implies that mean-variance efficient portfolios are a practical impossibility, and that attaining “pragmatic diversification” should instead be the goal of investors. We also argue that MPT is silent as to whether any fund manager can or should be able to beat his or her benchmark consistently. We can, however, combine the MPT framework with existing empirical evidence to generate practical advice about active investment for retail investors. For capital budgeting, we argue that the literature implies that the original single-beta capital asset pricing model (CAPM) should typically be implemented using a multi-beta framework.

Keywords: Markowitz, CAPM, Diversification, Capital Budgeting, Active Management

JEL Classification: G11, C61

Suggested Citation

Crack, Timothy Falcon and Grieves, Robin, The Practical Implications of Modern Portfolio Theory (December 13, 2017). Available at SSRN: https://ssrn.com/abstract=3086977 or http://dx.doi.org/10.2139/ssrn.3086977

Timothy Falcon Crack (Contact Author)

University of Otago - Department of Accountancy and Finance ( email )

Dunedin
New Zealand

Robin Grieves

Rollins College - Crummer Graduate School of Business ( email )

Winter Park, FL 32789
United States
1-407-646-2438 (Phone)

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
249
Abstract Views
1,031
rank
134,777
PlumX Metrics