Portfolio Selection
Harry Markowitz, a Nobel laureate economist, introduced the concept of diversification as a key principle of portfolio management in the 1950s. His groundbreaking research, published in a paper titled “Portfolio Selection” in 1952, outlined the benefits of diversifying investments to reduce risk.
Risk versus returns
Markowitz’s work emphasized that by combining assets with different risk and return characteristics in a portfolio, investors could potentially achieve a higher level of return for a given level of risk or minimize risk for a desired level of return. He introduced the concept of efficient portfolios, which are constructed by selecting assets aiming to maximize returns for a given level of risk or minimize risk for a given level of return.
Markowitz’s research formed the foundation of modern portfolio theory, which revolutionized the field of investment management. Diversification became widely recognized as an essential risk management technique, highlighting the importance of spreading investments across different asset classes, industries, and regions to reduce the impact of any single investment’s performance on the overall portfolio.
Portfolio management
Since then, diversification has become a fundamental principle of portfolio management, embraced by financial advisors and investors worldwide as a way to manage risk and potentially enhance returns.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
