Talk:Modern portfolio theory

message: Isn't the definition of risk adverse that an investor with two options, A showing a risk-corrected higher expected return and B a lower risk-corrected expected return but a lower risk choose B (that is, trading off expected return for less risk)?? I would not consider choosing the less risky assets with the SAME expected return as risk adversion as instead is defined in the article.
A.lobianco 09:16, 21 Oct 2013 (UTC)
thread_title: Risk averse definition

message: I added a picture.  I have the xfig source, so it is possible to modify it if this is too clunky. CSTAR 04:15, 1 Jul 2004 (UTC)
replies: text: Ooops you're right the CML is linear in the space of standard deviation, risk pairs.  Oh well, I'll fix that.CSTAR 15:27, 2 Jul 2004 (UTC)

text: I adjusted the graphic; I also take note of the fact that in the article risk is measured by standard deviation, which is necessary in order for the capital market line to be a straight line! CSTAR 16:45, 2 Jul 2004 (UTC)
thread_title: Graphics

message: I corrected two incorrect references to the Black-Scholes model. That model does not imply or assume that stock prices follow a martingale or that the best forecast of tomorrows prices is the price today.   —Preceding unsigned comment added by MathHisSci (talk • contribs) 22:01, 29 October 2009 (UTC)
replies: text: It is my recollection that returns could be achieved above the Efficient Frontier, but constrained by the Capital Market Line, by leveraging, i. e. shorting the risk free asset.  Also, couldn't being short an asset be seen as a synthetic asset that has an expected return with a (presumably high!) standard deviation.  Since "shorts" would be expected to have low covariance with "long" assets "shorts" might be great assets to create efficient portfolios.X17bc8 (talk) 17:49, 19 May 2009 (UTC)
thread_title: Black-Scholes

message: In order for the capital market line to be straight, risk should be standard deviation not (variance). I think. CSTAR 22:47, 14 Jul 2004 (UTC)
replies: text: That is true - I see it has been changed. Zain Ebrahim (talk) 22:21, 17 May 2008 (UTC)
thread_title:  Risk 

message: I see no discussion of what happens when there is an asymmetric distribution about the mean, which is always the case in financial models where the asset value is bounded on the low side by ZERO.
*Exactly.  This all seems to reply on the Gauss-Markov assumption (returns are normally distributed => wake up, they aren't, just use HRH on Bloomberg for a few indices or stocks).  As I understand it, the CAPM can outside of the Gauss Markov assumptions (significantly beyond the scope of the definition given on this page).  I do not know of any 'Omega metric' pages on wikipedia (which the derivation comes off), and feel I am probably not the best person to write one, though I would be happy to have a stab and link it in somewhere?
*I shall write something on Omega metrics, and stick a reference in the page (Omega being a generalised treatment for asymmetric returns, though is it non-parametric - CAPM can still be derived from it).
: Financial models don't a normal distribution of prices.  They assume a log-normal distribution of prices, aka a normal distriubtion of returns.  --206.248.177.127 (talk) 19:35, 2 January 2011 (UTC)
thread_title:  distribution about the mean 

message: Note that the theory uses an historical parameter, volatility, as a proxy for risk while return is an expectation on the future.  Is this an accurate description of the theory or of practice?  I would think that the theory says that expected return and expected volatility should be used. I don't the the theory prescribes using historical beta.  In practice people use historical return and historical beta, then adjust for their expectations.  Since it is very hard to develop numerical estimates of beta, it is usually expected return and historical beta.  
If not disagreements in the next few days, I'll make the change.  Thanks. Chris vLS 20:44, 19 Nov 2004 (UTC)
replies: text: Ideally, one should use some kind of time series analysis to estimate these parameters.  If one makes an assumption about the nature of the underlying time series process, then there is some rational justification for making estimates of the various parameters characterizing the process. I don't have a clue in fact how the nuts-and-bolts financial analysts actually compute these numbers and whether they would take exception to the characterization given in the article, but I think the person that put that material in (fintor) is knowledgeable about practices in this area. CSTAR 22:40, 19 Nov 2004 (UTC)
replies: text:  Oh, I'd absolutely agree about it as a statement of practice. I thought that it currently reads like a criticism of the abstract theory itself, claiming the CAPM nonsensically requires you to mix past and future.  In practice, there are tons of historical calculations of beta, but only a few proprietary models for predicting beta (see Barra, who sells both ]).(Indeed, all theories tell you to focus on good estimates of the future for all modeled parameters, but in practice, detailed analysis of past perfomance gets a lot of weight.) Chris vLS 08:17, 20 Nov 2004 (UTC)
replies: text:  I totally withdraw my comment. The text is correct. Nearly all forms I can find of the formula use E() to denote what is expected, and do not show E(beta).  Hence, the description is correct.  Sorry for the trouble. Chris vLS 19:02, 30 Nov 2004 (UTC)
thread_title:  Expected beta 

message: If you're going to change notation for rf, change it everywhere. CSTAR 18:40, 30 Nov 2004 (UTC)
thread_title:  Risk free asset 

message: This article was a nice introduction for me, but for those who plan on using this theory in structuring a portfolio, it's not very practical. I was reading the same page on investopedia (http://www.investopedia.com/terms/m/modernportfoliotheory.asp) and they said there were four distinct steps:
#Security Valuation
#Asset Allocation
#Portfolio Optimization
#Performance Measurement
Is there any chance of getting a section describing in practical terms how this theory is used? --Jens Schriver 19:10, 11 January 2006 (UTC)
thread_title:  Practical guide 

message: The Article Portfolio theory is a stub on the same topic.
I suggest that it should be merged into this article, and will do so fairly quickly if there are no objections.
Also I think that an article named modern portfolio theory needs to have something more than just a reference to arbitrage pricing theory.  Smallbones 09:49, 27 March 2006 (UTC)
replies: text: I don't see why the word "modern" is needed at all. There's nothing more modern about portfolio theory than other theories in finance and economics, or in science generally, and the term isn't used by specialists in the field. All theories change over time, but that's to be expected. So, I think the correct course is to merge this into Portfolio theoryJQ 02:36, 28 May 2006 (UTC)
thread_title:  Merge with Portfolio Theory, more APT needed here 

message: I was reading a recent FT article by Taleb that was pretty critical of some of this, and I was wondering why there isn't any criticism in the article.  Taleb's book, "The Black Swan" is fairly popular, should we bring in some of his (and others'?) criticisms?  Some articles like CAPM have "shortcomings" sections, but I'm not sure that is enough.  What would be a good way to bring in some criticism? Smmurphy(Talk) 19:29, 27 October 2007 (UTC)
thread_title:  Criticism by Taleb 

message: I just want to congratulate the authors of this article on doing a good job of explaining some very complex concepts in a concise manner.  It may be confusing to the ordinary Encyclopedia reader, but then a topic this arcane can hardly avoid that.  --Doradus (talk) 16:58, 16 October 2009 (UTC)
thread_title:  Nice job 

message: I've added a "criticism" section. Currently it has two parts, assumptions and shortcomings, both largely cribbed from the CAPM article (with which there is much overlap, an area ripe for cleanup.) To this I've added all of the problems with MPT I could think of or find here in the talk page. 
Much more work on the criticism section is needed. Your improvements would be very welcome! --Jonathan Stray (talk) 08:01, 8 November 2009 (UTC)
replies: text: Further, there is growing evidence that investors are not rational and markets are not efficient.[1][2] - I don't think this is true in general. As most people seem to know, it is actually very hard to make "above-average" money in financial markets, to add alpha or whatever you want to call it. If it was so inefficient as some people seem to espouse, it wouldn't be that hard. I don't understand why people bother having this discussion. uhh-hmm i will end there. --129.240.146.32 (talk) 16:54, 11 November 2010 (UTC)
thread_title:  Criticism section 

message: "A study conducted by Myron Scholes, Michael Jenson, and Fischer Black in 1972 suggests that the relationship between return and beta might be flat or even negatively correlated."
What is beta? I don't think this should be in the introduction unless beta is defined there. Does flat mean no correlation? Surement (talk) 01:41, 1 March 2013 (UTC)
thread_title:  Last sentence of intro means nothing to newcomer 

message: There's something called CAL in the graphic. Not defined anywhere in the article.  — Preceding unsigned comment added by 75.76.168.93 (talk) 19:06, 7 October 2015 (UTC)
replies: text: Hmm. That would be the Capital Allocation Line. You're right and it does need explanation somewhere. Will do that if no else gets there first. --regentspark (comment) 19:49, 7 October 2015 (UTC)
replies: text: Actually, it is explained in a different section on the page. Modern_portfolio_theory#Risk-free_asset_and_the_capital_allocation_line. I'll connect the two. A lot easier.--regentspark (comment) 19:51, 7 October 2015 (UTC)
thread_title:  CAL? 

message: Substituted at 00:15, 30 April 2016 (UTC)
thread_title: Assessment comment

message: Dr. Platen has reviewed this Wikipedia page, and provided us with the following comments to improve its quality:
We hope Wikipedians on this talk page can take advantage of these comments and improve the quality of the article accordingly.
Dr. Platen has published scholarly research which seems to be relevant to this Wikipedia article:
*Reference : Jan Baldeaux & Man Chung Fung & Katja Ignatieva & Eckhard Platen, 2014. "A Hybrid Model for Pricing and Hedging of Long Dated Bonds," Research Paper Series 343, Quantitative Finance Research Centre, University of Technology, Sydney.
ExpertIdeasBot (talk) 14:52, 24 June 2016 (UTC)
thread_title:  Dr. Platen's comment on this article 

message: Greetings Wikipedians! I commend all the contributors for their efforts. But sadly, this article lacks inline citations to reliable, verifiable sources. There are no citations - none at all! - in the following sections:
* 1.1: Risk and expected return
* 1.2: Diversification
* 2.1: Systematic risk and specific risk
This violates Wikipedia's policy on verifiability, which states: "Even if you are sure something is true, it must be verifiable before you can add it....The burden to demonstrate verifiability lies with the editor who adds or restores material, and it is satisfied by providing an inline citation to a reliable source that directly supports the contribution." Readers need a path to follow to verify that what they are reading is accurate and accepted by authorities in the field - particularly when the article is this technical and contains so many equations in math-major notation, proofs, and so on.
I hope someone will step forward to remedy this problem. Unsourced material is subject to being removed. My modest qualifications for this subject, such as they are, are set forth in my user profile. Cordially,BuzzWeiser196 (talk) 12:54, 11 April 2021 (UTC)
thread_title: Violates Wikipedia verifiability policy

message: I am new to the topic but it seems to me that to have the Capital Market Line as a straight line, the x-axis should be standard deviation. This is the case in the graphic, but the text says: "The image shows expected return on the vertical axis, and the horizontal axis should be labeled variance instead of standard deviation (volatility)." while the graphic's legend says "Note that the horizontal axis should be labeled variance, not volatility."
I have the impression that these two sentences should be removed, but as I am no expert in the field, I prefer not to do it (I could be mistaken).
A related confusion is whether the efficient frontier is hyperbolic or parabolic. I have the impression that it is hyperbolic if plotted with the standard deviation, and parabolic if plotted with the variance. Here again, I am not sure, but all should be consistent in this article and in others, in particular Markowitz model and Efficient frontier.
2001:67C:10EC:3C91:8000:0:0:106D (talk) 16:14, 13 November 2021 (UTC)
replies: text: I replaced parabola with hyperbola (you're right, obviously hyperbolic not parabolic) and removed the horizontal axis sentence (probably a remanent of other edits). --RegentsPark (comment) 16:27, 13 November 2021 (UTC)
thread_title:  Standard deviation vs. variance, hyperbole vs. parabole 

message: Ang natutunan ko sa taking ito ay ang pagiging matalino at mabait mapagdasal at ang mudule na ito ay mahalaga saakin dahil ito at nag sisilbing aral SA mga bata at makakakuha ka rin dito ng enspirasyon ang module na ito at importanti SA mga bata  — Preceding unsigned comment added by 136.158.100.25 (talk) 03:55, 26 April 2022 (UTC)
thread_title:  Portfolio