5. Modern Portfolio Theory

  1. Bernhard Pfaff

Published Online: 30 OCT 2012

DOI: 10.1002/9781118477144.ch5

Financial Risk Modelling and Portfolio Optimization with R

Financial Risk Modelling and Portfolio Optimization with R

How to Cite

Pfaff, B. (2012) Modern Portfolio Theory, in Financial Risk Modelling and Portfolio Optimization with R, John Wiley & Sons, Ltd, Chichester, UK. doi: 10.1002/9781118477144.ch5

Author Information

  1. Invesco Global Strategies, Germany

Publication History

  1. Published Online: 30 OCT 2012
  2. Published Print: 28 DEC 2012

ISBN Information

Print ISBN: 9780470978702

Online ISBN: 9781118477144



  • empirical mean-variance portfolios;
  • financial market turbulence;
  • Markowitz portfolios;
  • minimum variance;
  • modern portfolio theory;
  • portfolio optimization


This chapter reviews the Markowitz's work on modern portfolio theory. It discusses briefly the portfolio selection approach proposed by Markowitz and subsequently highlights the problems encountered in practice. It also presents the empirical artefacts of the optimized portfolios. Given the turbulence in the financial markets witnessed during the first decade of this century, the focus of academia and practitioners alike has again shifted to the Markowitz approach for selecting assets in a portfolio, in particular minimum variance portfolios. In contrast to the mean-variance portfolios, the weight vector of the global minimum variance one does not depend on the expected returns of the assets.

Controlled Vocabulary Terms

mean; variance analysis; portfolio