Modern Portfolio Theory

The concept of the market portfolio has a long history and dates back to the seminal work of Markowitz (1952). In his paper, Markowitz defined precisely what portfolio selection means: “the investor does (or should) consider expected return a desirable thing and variance of return an undesirable thing”. Indeed, Markowitz showed that an efficient portfolio is the portfolio that maximizes the expected return for a given level of risk (corresponding to the variance of portfolio return). Markowitz concluded that there is not only one optimal portfolio, but a set of optimal portfolios which is called the efficient frontier.