Portfolio Theory: From Markowitz to Michaud

This timeline shows the evolution of the Portfolio Theory.


The evolution of the Portfolio Theory from Harry Markowitz to Richard and Robert Michaud’s Resampled Efficiency.


Published in the Journal of Finance, Harry Markowitz’s seminal paper “Portfolio Selection” lays the foundation for Modern Portfolio Theory.


Markowitz fleshes out MPT in his book Portfolio Selection: Efficient Diversification of Investments, which introduces mean semivariance, a method of estimating downside risk.


Jack Treynor, a researcher at Boston-based consulting firm Arthur D. Little, writes an unpublished paper outlining the capital asset pricing model. CAPM calculates the expected return on an asset or portfolio by distinguishing between market risk and idiosyncratic, or diversifiable, risk.


William Sharpe publishes a paper on CAPM. Two years later the then–University of Washington professor unveils the Sharpe ratio, a formula for measuring risk-adjusted returns.


Independent of Sharpe and Treynor, Harvard Business School professor John Lintner comes out with his own version of CAPM.


University of Chicago finance professor Fischer Black develops the zero-beta CAPM, which calls for a portfolio that is uncorrelated with the market.


Stephen Ross, an economics and finance professor at the Wharton School of the University of Pennsylvania, invents arbitrage pricing theory. Unlike CAPM, APT links asset prices to inflation and a host of other factors.


In a ten-year study of 91 big pension funds published in the Financial Analysts Journal, Chicago money manager Gary Brinson and co-authors L. Randolph Hood and Gilbert Beebower find that asset allocation explains as much as 94 percent of long-term institutional return variations.


San Francisco State University finance professor Frank Sortino leads the development of a set of algorithms dubbed Postmodern Portfolio Theory. PMPT includes the Sortino ratio, which adjusts estimated returns for downside risk.


At Goldman, Sachs & Co. in New York, Fischer Black and quant Robert Litterman create a new asset allocation model. The Black-Litterman model allows investors to combine CAPM-expected returns with their own market views.


With their “three-factor” asset pricing model, University of Chicago finance professor Eugene Fama and Dartmouth College finance professor Kenneth French incorporate small-cap and value stocks into CAPM.


Richard and Robert Michaud of Boston’s New Frontier Advisors patent Resampled Efficiency, a statistical method of optimizing portfolios to weather a wide range of market conditions.