CHAPTER 5

The Portfolio Effect and the Free Lunch

The Limits of Diversification

Most people know that the Wright brothers invented the motor-operated airplane and that Alexander Graham Bell devised the telephone. However, many people do not know that a more modern innovation that has had a significant impact on people’s lives started with a single individual named Harry Markowitz. An investment portfolio is the total of all the investments owned by a single individual or organization. If you invest in the stock market, have a 401(k) at work, or use the services of a financial adviser, you likely have such a portfolio. Your investments are in a portfolio to take advantage of diversification. Before the 1950s, conventional wisdom held this was ...

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