Chapter 15
Through the Looking Glass of Modern Portfolio Theory
IN THIS CHAPTER
Getting portfolio basics under your belt
Understanding the hypothesis of an efficient market
Grasping the relationship between risk and returns
Finding the best balance
In his book Through the Looking Glass, the sequel to Alice’s Adventures in Wonderland, Lewis Carroll describes a girl who walks through a mirror into a world of wonderful yet threatening nonsense. That pretty much sums up modern portfolio theory: The process of mathematically modeling resource-allocation strategies is wonderful in its ability to make sense out of chaos, yet is also dangerous when the information is misinterpreted in nonsensical ways. A single miscalculated step into this land can lead to tragedy. Nevertheless, this threatening nonsense holds lessons to be learned; although the assumptions we use in modern portfolio theory are incorrect or impossible to use in a functional way, they give us an understanding of the way things work in theory. This, in turn, gives us a foundation upon which to develop our understanding of ...
Get Corporate Finance For Dummies, 2nd Edition now with the O’Reilly learning platform.
O’Reilly members experience books, live events, courses curated by job role, and more from O’Reilly and nearly 200 top publishers.
