Modern Portfolio Theory: Back to Basics

In its very simplistic form Modern Portfolio Theory assumes that investors are rational that markets are inherently efficient and that return can be increased by assuming additional risk. The portfolio optimization process requires a large set of data and multiple calculation steps. On the contrary Value Investing rejects these assumptions. It emphasizes the psychological and emotional factors that drive the markets and sees that an investor should be compensated for the intelligent effort they’re willing to spend managing their investments. Rather than being compensated for risk an investor must avoid it by employing a margin of safety. In this book the authors examine a portfolio weighing method using the margin of safety in an attempt to overcome the complexities and drawbacks of a mean-variance optimization model.