Modern Portfolio Theory
Lauren Medders
CTCT 7970 Special Topics
Dr. Leane Skinner

The Modern Portfolio Theory or Portfolio Theory was developed by Harry Markowitz. Markowitz’s theory was published in 1952 in the Journal of Finance under the Portfolio Selection section. (McClure, 2009) This theory states that if an investor invests in more than one stock then the risk of the portfolio will decrease. (McClure, 2009) The phrase “don’t put all your eggs in one basket” is a result of this theory. Having two risky stocks in a portfolio will always pay off. (McClure) When an investor invests in portfolios instead of single assets, it lowers the total risk of investment. (Daniel, 2009) There are two risks involved in individual stock returns and they are systematic risks and unsystematic risks. A systematic risk cannot be diversified away. An unsystematic risk is a specific risk. (McClure, 2009) The market is overall hard to beat, but you have a better chance of beating it by taking larger risks. (McClure)
The Modern Portfolio Theory is used in both a personal finance class and in a marketing class in the CTE courses. In each of these classes, stock markets are covered. During a stock market lesson an instructor could assign students to a group and have the group research a company to invest stock in. Each day before the class gets started; the members of that group will go to the computer to check the company’s that they invested in and then record it. At the end of the week or month however long the teacher decides to let them follow the stock, the students can present their portfolios to the teacher. Each group will also be required to give a presentation showing what stocks they chose, why they chose that stock, and what the end result for their group was. During my internship, my students were required to do something very similar to this and they really enjoyed it. There are several websites online that an instructor can use in their classroom to show the relationship between a stock and which ones to pick for your portfolio. The following link is to Stock Quest where instructors are able to create a customized stock game for their classroom. It is a step by step process and very simple to use. http://stocksquest.coe.uga.edu/C001759/stocksquest/mystocks_sample.htm

Research Articles
http://books.google.com/books?hl=en&lr=&id=khX_CWdx470C&oi=fnd&pg=PA1&dq=research+articles+on+the+portfolio+theory&ots=mrsKs5xGjr&sig=_f-8zZF9YBPJZKwPLBmBxouEKWU
http://www.jstor.org/pss/4480178
http://www.jstor.org/stable/2328831
http://rfs.oxfordjournals.org/cgi/content/abstract/13/2/257
http://www.jstor.org/pss/256772
http://www.jstor.org/stable/2352108
http://www.iijournals.com/doi/abs/10.3905/jpm.2004.443328

Other Resources on Modern Portfolio Theory
http://www.youtube.com/watch?v=ObYsfA0uKwM
http://faculty.chicagobooth.edu/john.cochrane/research/Papers/portfolio_text.pdf
http://online.wsj.com/article/SB122567428153591981.html
http://www.mhhe.com/business/finance/interactivefinsims/portfoliotheory/


Resources

McClure, Ben. Modern Portfolio Theory: An Overview. (2009)
Retrieved on July 8, 2009 from
http://www.investopedia.com/articles/06/MPT.asp

Daniel, Craig. Harry Markowitz’s Portfolio Theory. (2009)
Retrieved on July 16. 2009 from
http://www.associatedcontent.com/pop_print.shtml?content_type=article&content_type_id