Modern Portfolio Theory and Investment Analysis, 9th Edition

Preface

This book, as the title suggests, is concerned with the characteristics and analysis of individual securities, as well as with the theory and practice of optimally combining securities into portfolios. Part 1 of the book provides a description of securities and markets. Two chapters provide the reader with the institutional background to place the analytics that follow in perspective.

The second, and longest, part of the book discusses modern portfolio theory. We begin Part 2 with a detailed presentation of the theory of modern portfolio analysis and show that the characteristics of portfolios are significantly different from those of the individual securities from which they are formed. In fact, portfolio analysis is the recipe for one of the few “free lunches” in economics. By the end of Chapter 6, the reader will have learned the basis of portfolio theory from the relationship of portfolio characteristics to security characteristics to the method of computing sets of portfolios that investors will find desirable.

The theory presented at the beginning of the book has been around long enough that major breakthroughs have occurred in its implementation. These breakthroughs involve simplification of the amount and type of inputs to the portfolio problem (Chapters 7 and 8), as well as simplification of the computational procedure to find sets of desirable portfolios (Chapter 9). The major advantage in the latter simplification is that the portfolio selection process and the ...