Risk-Return Analysis: The Theory and Practice of Rational Investing (Volume One)

1THE EXPECTED UTILITY MAXIM

INTRODUCTION

As explained in the preceding preface to the four parts planned for the present book, the fundamental assumptions of Markowitz (1959) are in its Part 4, Chapters 10 through 13. These fundamental assumptions are at the back rather than the front of Markowitz (1959) because Markowitz feared that no practitioner would read a book that began with an axiomatic treatment of the theory of rational decision making under uncertainty. But now, clearly, these matters have become urgent. They bear directly on controversies such as:

• Under what conditions one should use mean-variance (MV) analysis

• What should be used in its stead when mean-variance analysis is not applicable

• How a single-period risk-return analysis ...