Institutional Investors and the Stock Market

Abstract

Implications of Modern Portfolio Theory for Investment Management. The general principles of portfolio management are explained by Dobbins and Witt, Sprecher, Francis, Van Home and Fama and Miller. Portfolio theory is concerned with the choice of efficient combinations of assets and its foundation lies in the work of Markowitz. It is assumed that investors base their decisions simply on the expected return and variance of return of assets, where the variance is taken to measure risk. For any given level of risk, the optimal portfolio is that which offers the maximum expected return; and for any given expected return, the investor prefers minimum risk. The set of efficient portfolios therefore comprises those combinations of assets which promise the highest expected return corresponding to each level of risk.