Harry M. Markowitz
Research professor, department of economics, University of California, San Diego
Harry Markowitz shared the 1990 Nobel Memorial Prize in Economic Sciences for his work that originated in 1952 and laid the foundation of modern portfolio theory. That work eventually revolutionized investment decision-making by applying mathematical and computer techniques.
It was the "economics of uncertainty" that drew his interest as a student at the University of Chicago, he has recalled.
As a Ph.D. candidate, he wrote an article, "Portfolio Selection," in which he unveiled a novel way of relating risk and return. In that article, published in 1952 in The Journal of Finance, he showed how to build portfolios of stocks in an efficient way, in terms of expected return and risk. He developed a mathematical means of identifying risk, showing the relative risk of a stock should be viewed in the context of an entire portfolio.
Mr. Markowitz's article "provided the first mathematical treatment of the concept of investment diversification, thereby giving rigor to what previously had been ad hoc decisions," said Bruce I. Jacobs, principal, Jacobs Levy Equity Management Inc., Florham Park, N.J.
"From that point forward, a security's risk would not be measured separately from that of other securities, but instead as part of its contribution to an overall portfolio. (Mr.) Markowitz' efficient frontiers highlighted the portfolios having the best tradeoffs between risk and return."
His 1959 book, "Portfolio Selection: Efficient Diversification of Investments," expanded on his ideas. But it took 20 years before "the old-guard fundamentalists grudgingly paid any attention," Frank Sortino, director of the Pension Research Institute, Menlo Park, Calif., was quoted in Pensions & Investments as saying.
The committee that awarded the Nobel to Mr. Markowitz noted his "work on portfolio theory may be regarded as having established financial microanalysis as a respectable research area in economic analysis."