The objective of portfolio management is to minimize risk in order to ascertain the target return, given that, for the specific investor, we have the target return and risk tolerance captured from the IPS and historical returns. Typical portfolio optimization models used in the industry include the Markowitz mean-variance model and the Treynor-Black model.
An economist, named Harry Markowitz, introduced mean-variance analysis, which is also known as Modern Portfolio Theory (MPT), in 1952. He was awarded a Nobel Prize in Economics for his theory.
The mean-variance model is a framework for assembling asset portfolios so that a return can be maximized for a given risk level. It is an extension of investment diversification. Investment diversification is an idea that suggests investors should invest in different kinds of financial assets. Investment diversification is less risky in comparison to investing in only one...
