"The 'radical' of one century is the 'conservative' of the next." -Mark Twain In this series, I'm going to explore some of the advances in portfolio management, construction, and modeling since the advent of Harry Markowitz's Nobel Prize winning Modern Portfolio Theory (MPT) in 1952. MPT's mean-variance optimization approach shaped theoretical asset allocation models for decades after its introduction. However, the theory failed to become an accepted industry practice, so we'll explore why that is and what advances have developed in recent years to address the shortcomings of the original model. The Problems with Markowitz For the purpose of illustrating the benefits of diversification in a simple two-asset portfolio, Markowitz's model was a useful tool in producing optimal weights at each level of assumed risk to create efficient portfolios. However, in reality, investment portfolios are complex and composed of large numbers of holdin
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