RewardandRiskAnalytics   2012

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Theory > Models > 
Last revised: June 03, 2012

Reference Desk

Harry M. Markowitz, Portfolio Selection. New Haven: Yale, 1959.

Harry Markowitz published (originally in 1959)  this compendium of his original ideas that became the foundation for two industries that still analyze and report on Rewardand Risk.  The first industry focuses on investor portfolio risk, defined as variance (or standard deviation) of rate of return.

The second industry (based on extensions of Markowitz portfolio theory by  the Sharpe (1965), Lintner(1965), and others) focuses on risk of incompletely diversified investments; it defines risk as "beta risk", which goes by other names, such as systematic risk, covariance risk, and non diversifiable risk.

Harry M. Markowitz, Merton H. Miller, and William F. Sharpe. The Founders of Modern Finance: Their Prize-Winning Concepts and 1990 Nobel Lectures [Paperback]

The Winners of the 1990 "Nobel Prize for Economics" ["The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 1990."] were Harry M. Markowitz, Merton H. Miller, and William F. Sharpe. Markowitz won for developing "the theory of portfolio choice". Miller won "for his fundamental contributions to the foundations of corporate finance." Sharpe won for " his contributions to the theory of price formation for financial assets". 

Markowitz took off in a dream and landed in ... uh, ... Reality 2012-4-20

When Harry Markowitz's flight landed in Chicago in 1955, so he could defend his dissertation, Portfolio Selection, he thought, "I know this subject cold. Not even Dr. Milton Friedman can give me a hard time."

Famous ... last ... words.

Since his eureka moment in 1950, Harry Markowitz had been developing his thoughts on portfolio selection. When they were ready, he polished his dissertation and sent it to his committee. When they were ready for him, he flew from Santa Monica, CA to Chicago to defend it.

"About five minutes into my defense, Friedman said, 'Harry, I've read your dissertation. I don't find any mistakes in the math.but this isn't a dissertation in economics.' ... Most of the next hour and a half was spent with Friedman telling me that they weren't going to give me a Ph.D. in economics.

"He said, 'Harry, you have a problem: It's not economics; it's not business administration; it's not mathematics.' Professory Marschak said, 'It's not literature.'  Then they sent me out to the hall to await their decision. About five minutes later, Marschak comes out and says, 'Congratulations, Dr. Markowitz.'"

(Source: interview. Reprint via

How Markowitz conceived portfolio analysis

In an interview, Harry Markowitz described how he got the idea for portfolio theory. One afternoon in 1950, he was in the library, reading John Burr Williams's Theory of Investment Value. Williams seemed to say that a stock's value was the present value of its expected dividends, and that a portfolios's value would be the same. No mention of risk! But, Markowitz had been also been looking at "Wiesenberger's Investment Companies, and, clearly, investors diversified to reduce risk. He grabbed Uspensky's Introduction to Probability from the library shelf and saw that variance of a sum of random variables depended on things called covariances, not just on component variances.

Markowitz said, "I'm an economist, so I drew a graph. putting risk on one axis and return on the other, plot[ting] a curve which is now called the efficient frontier."

Markowitz was taking a course on activity analysis with Tjalling Koopmans. "He distinguished between efficient and inefficient allocations of resources."  Markowitz had efficient and inefficient portfolios, and needed to figure out how to compute which portfolios were efficient. With that, "the basic ideas were there."

RW Jr.: All in just one afternoon?"

HM: One afternoon. 

Source: SFO interview, reprint via