Article 1

YLAGAN, ROEN IVAN J.

Markowitzs Modern Portfolio Theory has revolutionized the investors perspective on investing.
By using the expected return variance of return rule for a set of particular stocks, one can exploit the
benefits of diversification having a reduced riskiness of the portfolio while maintaining an acceptable level
of expected return for the given riskiness of the portfolio (Rubinstein, 2002). In general, I have positive
inclination Markowitzs theory. He had a clear theoretical and mathematical model of how a portfolio of a
certain investor should be constructed. It also presented diversification from a mathematical perspective
which, at his time, was the first to be presented (Rubinstein, 2002). Moreover, this theory have been the
standard for most of the investors around the world. In fact, it is estimated that approximately $7 trillion
worth of assets are under the principles of Modern Portfolio Theory (Solin, 2012). Although it is a widely
accepted principle in the field of finance, Markowitzs theory have failed to be manifest in real-life
scenarios. One of the examples is the 2008 financial crisis. According to Solin (2012), an investor in 2008
with diversified portfolio of 60 percent stocks and 40 percent bonds using MPT had a negative 23.01
percent return. This is an example of an instance where securities are becoming too correlated and
having higher volatility having a one direction of price movement of securities (Swedroe, 2012).
Diversification would not that be very effective when market crashes (systematic risk). Because of these
events, some investors are not fond of diversification like Warren Buffet (Cunningham, 2013). Buffet
focuses on businesses hes knowledgeable about and invest heavily on those. There are still other
challenges and issues that MPT has, but improving it gives investors a better foundation of this principle.

What are other alternatives of investment strategies other than MPT that we can use?
What are other major events wherein MPT didnt work?
What is the Efficient Frontier?

REFERENCES
Cunningham, L. A. (2013, April 13). Warren Buffet v. Modern Finance Theory. Retrieved from CLS Blue
Sky Blog: http://clsbluesky.law.columbia.edu/2013/04/15/warren-buffett-v-modern-finance-theory/
Rubinstein, M. (2002, June). Markowitz's "Portfolio Selection": A Fifty-Year Retrospective. The Journal of
Finance, 1041-1045.
Solin, D. (2012, December 12). Why I Am Clinging to Failed Investment Strategies. Retrieved from US
News: http://money.usnews.com/money/blogs/on-retirement/2012/12/13/why-i-am-clinging-tofailed-investment-strategies
Swedroe, L. (2012, October 10). In Defense of "Modern Portfolio Theory". Retrieved from CBS News:
http://www.cbsnews.com/news/in-defense-of-modern-portfolio-theory/