Post-modern portfolio theory: Difference between revisions
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'''Post-modern portfolio theory<ref>The earliest citation of the term 'Post-Modern Portfolio Theory' in the literature appears in 1993 in the article "Post-Modern Portfolio Theory Comes of Age" by Brian M. Rom and Kathleen W. Ferguson, published in ''[[The Journal of Investing]]'', Winter, 1993. Summarized versions of this article have been subsequently published in a number of other journals and websites.</ref> (or "PMPT")''' is an extension of the traditional [[modern portfolio theory]] (“MPT”, which is an application of [[mean-variance analysis]] or “MVA”). Both theories propose how rational investors should use diversification to optimize their portfolios, and how a risky asset should be priced. |
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What has come to be known as Post Modern Portfolio Theory (PMPT) has no single author. It combines the theoretical research of many authors and has expanded over several decades as academics at universities in many countries tested these theories to determine whether or not they had merit. The essential difference between PMPT and the modern portfolio theory of Markowitz and Sharpe (MPT) is that PMPT focuses on the return that must be earned on the assets in a portfolio in order to meet some future payout. This internal rate of return (IRR) is the link between assets and liabilities. PMPT measures risk and reward relative to this IRR while MPT ignores this IRR and measures risk as dispersion about the mean or average return. The result is substantially different portfolio constructions. |
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Empirical investigations began in 1981 at the Pension Research Institute (PRI) at San Francisco State University. Dr. Hal Forsey and Dr. Frank Sortino were trying to apply Peter Fishburn’s theory published in 1977 to Pension Fund Management. The result was an asset allocation model that PRI licensed Brian Rom to market in 1988. Mr. Rom heard someone at a conference use the term PMPT and began to use the term to market PRI’s allocation model. Sortino and Steven Satchell at Cambridge University co-authored the first book on PMPT. This was intended as a graduate seminar text in portfolio management. A more recent book by Sortino was written for practitioners. The first publication in a major journal was co-authored by Sortino and Dr. Robert van der Meer, then at Shell Oil Netherlands. The concept was popularized by numerous articles by Sortino in Pensions and Investments magazine. Videos, books and papers on PMPT can be found at [http://www.sortinodtr.com]. Sortino’s current comments regarding PMPT are found at [http://pmpt.wordpress.com]. |
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Sortino claims the major contributors to the underlying theory are: |
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* Peter Fishburn at the University of Pennsylvania who developed the mathematical equations for calculating [[downside risk]] and provided proofs that the Markowitz model was a subset of a richer framework. |
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* Atchison & Brown at Cambridge University who developed the three parameter lognormal distribution which was a more robust model of the pattern of returns than the bell shaped distribution of MPT. |
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* Bradley Efron, Stanford University, who developed the bootstrap procedure for better describing the nature of uncertainty in financial markets. |
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* William Sharpe at Stanford University who developed returns based style analysis that allowed more accurate estimates of risk and return. |
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* Daniel Kahneman at Princeton & Amos Tversky at Stanford who pioneered the field of Behavioral Finance which contests many of the findings of MPT. |
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==Endnotes== |
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{{Reflist}} |
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==References== |
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For a comprehensive survey of the early literature, see R. Libby and P.C. Fishburn [1977]. |
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*{{cite journal |last=Bawa |first=V. S. |authorlink= |coauthors= |year=1982 |month= |title=Stochastic Dominance: A Research Bibliography |journal=Management Science |volume= |issue= |pages= |id= |url= |accessdate= |quote= }} |
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*{{cite journal |last=Balzer |first=L. A. |authorlink= |coauthors= |year=1994 |month= |title=Measuring Investment Risk: A Review |journal=Journal of Investing |volume= |issue= |pages= |id= |url= |accessdate= |quote= }} |
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*Clarkson, R.S. Presentation to the Faculty of Actuaries (British). February 20, 1989. |
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*{{cite journal |last=Fishburn |first=Peter C. |authorlink= |coauthors= |year=1977 |month= |title=Mean-Risk Analysis with Risk Associated with Below-Target Returns |journal=American Economic Review |volume=67 |issue=2 |pages=116–126 |doi= |url= http://jstor.org/stable/1807225|accessdate= |quote= |publisher=American Economic Association }} |
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*{{cite journal |last=Hammond |first=Dennis R. |authorlink= |coauthors= |year=1993 |month= |title=Risk Management Approaches in Endowment Portfolios in the 1990's |journal=Journal of Investing |volume= |issue= |pages= |id= |url= |accessdate= |quote= }} |
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*Harlow, W.V. "Asset Allocation in a Downside Risk Framework." Financial Analysts Journal, Sept-Oct 1991. |
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*"Investment Review." [[Brinson Partners]], Inc. 1992. |
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*Kaplan, P. and L. Siegel. "Portfolio Theory is Alive and Well," Journal of Investing, Fall 1994. |
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*Lewis, A.L. "Semivariance and the Performance of Portfolios with Options." Financial Analysts Journal, July–August 1990. |
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*Leibowitz, M.L. and S. Kogelman. "Asset Allocation under Shortfall Constraints." Salomon Brothers, 1987. |
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*Leibowitz, M.L., and T.C. Langeteig. "Shortfall Risks and the Asset Allocation Decision." Journal of Portfolio management, Fall 1989. |
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*{{cite journal |last=Libby |first=R. |authorlink= |coauthors=Fishburn, P.C. |year=1977 |month= |title=Behavioral Models of Risk taking in Business decisions: A Survey and Evaluation |journal=Journal of Accounting Research |volume=15 |issue=2 |pages=272–292 |doi=10.2307/2490353 |url= http://jstor.org/stable/2490353|accessdate= |quote= |publisher=Accounting Research Center, Booth School of Business, University of Chicago }} See also {{cite journal |last=Kahneman |first=D. |authorlink= |coauthors=Tversky, A. |year=1979 |month= |title=Prospect Theory: An Analysis of Decision under Risk |journal=Econometrica |volume=47 |issue=2 |pages=263–291 |doi=10.2307/1914185 |url= http://jstor.org/stable/1914185|accessdate= |quote= |publisher=The Econometric Society }} |
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*Post-Modern Portfolio Theory Spawns Post-Modern Optimizer." Money Management Letter, February 15, 1993. |
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*Rom, B. M. and K. Ferguson. "Post-Modern Portfolio Theory Comes of Age." Journal of Investing, Winter 1993. |
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*Rom, B. M. and K. Ferguson. "Portfolio Theory is Alive and Well: A Response." Journal of Investing, Fall 1994. |
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*Rom, B. M. and K. Ferguson. "A software developer's view: using Post-Modern Portfolio Theory to improve investment performance measurement." Managing downside risk in financial markets: Theory, practice and implementation; Butterworth-Heinemann Finance, 2001; p59. |
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*Sharpe, W.F. "Capital Asset Prices: A Theory of Market Equilibrium under Consideration of Risk." Journal of Finance, Vol. XIX (1964) |
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*Sortino, F. "Looking only at return is risky, obscuring real goal." Pensions and Investments magazine, November 25, 1997. |
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*Sortino, F. and H. Forsey "On the Use and Misuse of Downside Risk." The Journal of Portfolio Management, Winter 1996. |
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*Sortino, F. and L. Price. "Performance Measurement in a Downside Risk Framework." Journal of Investing, Fall 1994. |
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*Sortino, F. and S. Satchell, editors. "Managing downside risk in financial markets: Theory, practice and implementation" Butterworth-Heinemann Finance, 2001. |
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*Sortino, F. and R. van der Meer. "Downside Risk: Capturing What's at Stake." Journal of Portfolio Management, Summer 1991. |
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*"Why Investors Make the Wrong Choices." ''Fortune Magazine'', January 1987. |
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==External links== |
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*[http://investmenttechnologies.com/publications.html Investment Technologies] |
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*[http://www.fpanet.org/journal/articles/2005_Issues/jfp0905-art7.cfm FPA Net] |
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*[http://investmenttechnologies.com/about.html Investment technologies] |
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{{stock market}} |
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[[Category:Financial economics]] |
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[[Category:Finance theories]] |
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[[Category:Mathematical finance]] |
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[[Category:Investment]] |
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[[Category:Portfolio theories]] |
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