"The essence of MPT is this: Risk and return go hand in hand. The greater the return
you desire, the greater the risk you incur. I like rapid growth, so I look for those kinds
of companies, and my trigger point for selling is not price. It is when the underlying
reason for buying the stock (rapid growth) is compromised. The MPT theorist would
point out that a value play is one in which the risk is lower than would be implied by the
expected rate of return."
Paul,
If MPT is taught in all the business schools, and claims there are value plays in which risk is lower than the expected return, does this not go against the Efficient Market Hypothesis, also taught by all the business schools and just as respected in the *academic* community?
MPT relies on the assumption that correlations between the stocks/asset classes/etc. being compared will hold. The efficient portfolios under MPT typically use historical correlations between the instruments to form the conclusions.
The problem is this is a curve fit dream. I have seen countless examples of this theory being used, assigning historical correlations between instruments where there is no valid assumption that the correlations will hold. The correlations used are simply a historical extrapolation of noncorrelated data. You can always find a correlation number.
If you make enough optimal MPT portfolios, and carry them on into the future, my findings have consistently shown that the portfolio is no longer on the curve.
I know I may get some strong feedback from this, since MPT is so entrenched in 'common knowledge'. All I know is that academia is very often wrong. The world was once flat, you know. |
