Nobel Prize winner Harry Markowitz, creator of Modern Portfolio Theory (MPT), has died in California aged 95.
Markowitz created MPT in 1952, which measures the risk of a portfolio as the standard deviation of portfolio returns, and for decades has been accepted in finance theory. Modern portfolio theory states that risk and return follow a linear relation and investors are compensated only for holding non-diversifiable or systematic risk.
He had since stated the idea for MPT came to him one afternoon while reading John Burr Williams’ book on investment probability, Theory of Investment Value.
His best-known work was published in The Journal of Finance in 1952 and expanded on in 1959. In 1968, he began the hedge fund Arbitrage Management Company, which was based on MPT.
MPT has since been viewed as one of the foundations of modern investing strategies.
However, there are critics who feel it lacks depth in measuring portfolio risk because it does not seek to explain the underlying drivers of equity-based portfolio returns.
MPT was followed by the design of the efficient frontier, an investment tool that charts the level of diversification that will offer the highest return on an investor’s desired level of risk. An “efficient” portfolio is one that delivers maximum return for that investor’s risk tolerance.
Markowitz was awarded a Nobel prize in economics in 1990 with colleague William F Sharpe for his development of the theory of portfolio science. At the time, he was a professor at Baruch College at the University of New York.
He later served on faculties at Rutgers University, Wharton School at the University of Pennsylvania, the University of California Los Angeles, and Rady School of Management at the University of California San Diego.
He was born in Chicago in August 1927 and studied at the University of Chicago and the Cowles Commission for Research in Economics (now part of Yale University).
He died on 22 June in San Diego from pneumonia and sepsis. He is succeeded by four children and his wife’s son from a previous marriage.
