Equity Valuation and Portfolio Management

Preface

In an editorial in the Winter 2011 issue of the Journal of Portfolio Management, Mark Kritzman notes the following regarding what is popularly referred to as Markowitz portfolio theory: “Mean-variance optimization is about to begin its 60th year and by all accounts it has aged extremely well.” He goes on to say, “As with many innovations, however, practitioners of the old technology resisted change and defended their resistance with a variety of excuses, which persist even today.” There are several reasons why practitioners were reluctant or slow to adopt a more quantitative approach such as that offered by the mean-variance framework. The computing power needed to manipulate the databases used to obtain the required inputs for mean-variance analysis and then efficiently solve for the optimal portfolios was very limited in the years that followed its introduction in 1952. Major advances in computing power have taken care of this obstacle, as well as the availability of commercial software for solving large complex optimization problems.

A second reason for the reluctance or inability to adopt a more quantitative approach was simply practitioners' lack of the mathematical skill set necessary to appreciate the advantages of a quantitative approach. Since the late 1970s, however, university finance programs have armed their graduates with the mathematical and statistical skills needed to deal with quantitative models. In fact, over the past decade, a good number of universities ...