De Finetti Scoops Markowitz

Journal of Investment Management, Vol. 4, No. 3, Third Quarter 2006

Posted: 3 Oct 2006

See all articles by Harry Markowitz

Harry Markowitz

University of California at San Diego

Abstract

In 1940, in the context of choosing optimum reinsurance levels, Bruno de Finetti essentially proposed mean-variance analysis with correlated risks. It was not until 1952 that Markowitz and Roy introduced mean-variance analysis with correlated risks into the financial literature. De Finetti solved the problem of computing mean-variance efficient frontiers for a particular constraint set (one that describes the reinsurance problem) assuming uncorrelated risks. While he understood and explained the importance of the case with correlated risks, he did not provide an algorithm for this case. In fact, one of his conjectures concerning its solution was incorrect. The present article summarizes de Finetti's contribution, presents an algorithm for solving "the de Finetti problem" when risks are correlated, and illustrates these matters with an easily visualized two-policy reinsurance problem.

Keywords: de Finetti, mean-variance analysis, critical line algorithm

Suggested Citation

Markowitz, Harry, De Finetti Scoops Markowitz. Journal of Investment Management, Vol. 4, No. 3, Third Quarter 2006. Available at SSRN: https://ssrn.com/abstract=934412

Harry Markowitz (Contact Author)

University of California at San Diego ( email )

9500 Gilman Drive
La Jolla, CA 92093-0508
United States
(858) 534-3383 (Phone)

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