CHAPTER 3

MODERN PORTFOLIO THEORY PRINCIPLES AND PRACTICES

        A physicist, a chemist, and an economist are stranded on an island with nothing to eat. A can of soup washes ashore. The physicist says, “Let’s smash the can open with a rock.” The chemist says, “Let’s build a fire and heat the can first.” The economist says, “Let’s assume we have a can opener.… ”

George Goodwin (“Adam Smith”)

IN THIS CHAPTER,* I GIVE an overview of modern finance and its relationship to dual momentum.1 I also show why we should sometimes be skeptical of the “experts.” In the words of the well-regarded economist Joan Robinson, “The purpose of studying economics is not to acquire a set of ready-made answers to economic questions, but to learn to avoid being deceived ...

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