He sent me to Professor Marshall Ketchum who provided a reading list as a guide to the financial theory and practice of the day. The basic concepts of portfolio theory came to me one afternoon in the library while reading John Burr Williams's Theory of Investment Value . Williams proposed that the value of a stock should equal the present value of its future dividends. Since future dividends are uncertain, I interpreted Williams's proposal to be to value a stock by its expected future dividends. This, I knew, was not the way investors did or should act.
Investors diversify because they are concerned with risk as well as return.
Variance came to mind as a measure of risk. The fact that portfolio variance depended on security covariances added to the plausibility of the approach. Since there were two criteria, risk and return, it was natural to assume that investors selected from the set of Pareto optimal risk-return combinations. I left the University of Chicago and joined the RAND Corporation in 1952. My 1959 book was principally written at the Cowles Foundation at Yale during the academic year 1955-56, on leave from the RAND Corporation, at the invitation of James Tobin .