Question A:
Harry Markowitz, the Nobel Prize-winning pioneer of modern portfolio theory, passed away earlier this year:
https://afajof.org/news/in-memoriam-harry-markowitz-past-president-of-the-american-finance-association-1927-2023/
Application of the principles of modern portfolio theory allows investors in practice to achieve substantial improvements in the risk-expected return trade-off relative to naive strategies such as equal-weighting that do not take account of return covariances.
Responses
Responses weighted by each expert's confidence
Question B:
Widespread adoption of modern portfolio theory by investors has substantially improved the efficiency of capital allocation in financial markets.
Responses
Responses weighted by each expert's confidence
Question A Participant Responses
| Participant | University | Vote | Confidence | Bio/Vote History |
|---|---|---|---|---|
 John Campbell |
Harvard | Bio/Vote History | ||
|
Although there are pitfalls in using historical covariances to predict future covariances, thoughtful application of modern portfolio theory can indeed improve the risk-return tradeoff.
|
||||
 John Cochrane |
Hoover Institution Stanford | Bio/Vote History | ||
|
Actual mean-variance calculations don't work well in practice. But portfolio theory tells us all to diversify, and what that means exactly. Investors today, via funds, hold portfolios that are much better diversified than the individual stocks they held when Markowitz wrote.
|
||||
 Francesca Cornelli |
Northwestern Kellogg | Did Not Answer | Bio/Vote History | |
|
|
||||
 Douglas Diamond |
Chicago Booth | Bio/Vote History | ||
|
|
||||
 Darrell Duffie |
Stanford | Bio/Vote History | ||
|
Surprisingly, empirical evidence suggests that equal-weighted portfolios have done about as well as market weights, which are Markowitz-optimal in equilibrium. But equal weights are obviously not consistent with market clearing (See Sharpe)!
|
||||
 Janice Eberly |
Northwestern Kellogg | Bio/Vote History | ||
|
|
||||
 Eugene Fama |
Chicago Booth | Bio/Vote History | ||
|
In the early 1950s Markowitz laid the foundations for portfolio selection. Building on Markowitz, Sharpe (mid-1960s) produced the first asset pricing model. The work on market efficiency in the 1960s and thereafter provided empirical justification for passive investing.
|
||||
 Xavier Gabaix |
Harvard | Bio/Vote History | ||
|
|
||||
 Itay Goldstein |
UPenn Wharton | Bio/Vote History | ||
|
|
||||
 John Graham |
Duke Fuqua | Bio/Vote History | ||
|
|
||||
 Campbell R. Harvey |
Duke Fuqua | Bio/Vote History | ||
|
Correlations should be taken into account in diversifying portfolios. However, in applying MPT, we need to be careful. 1952 paper assumes we exactly know expected returns & covariances. It also assumes variance=risk p92. It is impt to take uncertainty & other risks into account.
|
||||
 David Hirshleifer |
USC | Bio/Vote History | ||
|
|
||||
 Harrison Hong |
Columbia | Bio/Vote History | ||
|
Studies go back on forth on this issue
|
||||
 Wei Jiang |
Emory Goizueta | Bio/Vote History | ||
|
|
||||
 Steven Kaplan |
Chicago Booth | Bio/Vote History | ||
|
|
||||
 Anil Kashyap |
Chicago Booth | Bio/Vote History | ||
|
Important to remember what kind of advice people were following before him
|
||||
 Ralph Koijen |
Chicago Booth | Bio/Vote History | ||
|
While it is challenging to estimate covariances and expected returns using historical return data alone, using characteristics helps to outperform the 1/N benchmark (Section 6.1 of the first paper; Table 1 of the second paper; Table 5 of the third paper)
-see background information here -see background information here -see background information here |
||||
 Camelia Kuhnen |
UNC Kenan-Flagler | Bio/Vote History | ||
|
|
||||
 Andrew Lo |
MIT Sloan | Did Not Answer | Bio/Vote History | |
|
|
||||
 Michelle Lowry |
Drexel LeBow | Bio/Vote History | ||
|
|
||||
 Sydney Ludvigson |
NYU | Bio/Vote History | ||
|
|
||||
 Matteo Maggiori |
Stanford GSB | Bio/Vote History | ||
|
|
||||
 Gregor Matvos |
Northwestern Kellogg | Did Not Answer | Bio/Vote History | |
|
|
||||
 Tobias Moskowitz |
Yale School of Management | Bio/Vote History | ||
|
Theoretically this is true. When having to estimate inputs with substantial error, the results can be noisy, but innovations in how to improve estimation have made this a big success.
|
||||
 Stefan Nagel |
Chicago Booth | Bio/Vote History | ||
|
There are a variety of practical hurdles (e.g., estimation of means and covariance, non-tradable wealth) but an investor certainly benefits from applying the basic principles (e.g., that covariances matter for portfolio risk, not individual asset variances)
|
||||
 Jonathan Parker |
MIT Sloan | Bio/Vote History | ||
|
|
||||
 Christine Parlour |
Berkeley Haas | Bio/Vote History | ||
|
In practice many "optimized" portfolios are subject to constraints (rebalancing costs/short selling). Depending on the number of constraints, outcomes will look like the simple heuristic.
|
||||
 Thomas Philippon |
NYU Stern | Bio/Vote History | ||
|
|
||||
 Manju Puri |
Duke Fuqua | Did Not Answer | Bio/Vote History | |
|
|
||||
 Michael R. Roberts |
UPenn Wharton | Bio/Vote History | ||
|
|
||||
 Paola Sapienza |
Northwestern Kellogg | Bio/Vote History | ||
|
It is an important framework but there are many limitations based on the assumptions (returns have to be normally distributed, investors allocate all portfolio assets to a single timeframe, past data predict future data). These assumptions are often not verified in practice
|
||||
 Amit Seru |
Stanford GSB | Bio/Vote History | ||
|
|
||||
 Robert Stambaugh |
UPenn Wharton | Bio/Vote History | ||
|
Key points of Markowitz (1952, JF): Consider the E-V tradeoff (vs just max E), diversify to reduce V, and covariance's role in V makes diversifying across industries important. Equal vs non-equal weights is a lesser point, missing the broader message of modern portfolio theory.
|
||||
 Laura Starks |
UT Austin McCombs | Bio/Vote History | ||
|
|
||||
 Jeremy Stein |
Harvard | Bio/Vote History | ||
|
|
||||
 Johannes Stroebel |
NYU Stern | Bio/Vote History | ||
|
|
||||
 Amir Sufi |
Chicago Booth | Bio/Vote History | ||
|
|
||||
 Sheridan Titman |
UT Austin McCombs | Bio/Vote History | ||
|
|
||||
 Stijn Van Nieuwerburgh |
Columbia Business School | Bio/Vote History | ||
|
The equal weight 1/N rule has been shown to be hard to beat
-see background information here |
||||
 Toni Whited |
UMich Ross School | Bio/Vote History | ||
|
|
||||
Question B Participant Responses
| Participant | University | Vote | Confidence | Bio/Vote History |
|---|---|---|---|---|
|
John Campbell |
Harvard | Bio/Vote History | ||
|
This is a tricky question because passive investors opt out of price discovery; however, active investors using modern portfolio theory do improve the efficiency of capital allocation - aided by the analytical tools and cheap trading made possible by information technology.
|
||||
|
John Cochrane |
Hoover Institution Stanford | Bio/Vote History | ||
|
Investors haven't adopted portfolio theory. (Some hedge funds do, but not most institutions and individuals). Plus, it was never about investment or market efficiency.
|
||||
|
Francesca Cornelli |
Northwestern Kellogg | Did Not Answer | Bio/Vote History | |
|
|
||||
|
Douglas Diamond |
Chicago Booth | Bio/Vote History | ||
|
|
||||
|
Darrell Duffie |
Stanford | Bio/Vote History | ||
|
Before Markowitz and Sharpe finally took a grip on practice (with diversification and index funds), many investors paid large amounts of transactions costs to do "stock picking," which is clearly risk-return inferior except for investors with excellent private information.
|
||||
|
Janice Eberly |
Northwestern Kellogg | Bio/Vote History | ||
|
|
||||
|
Eugene Fama |
Chicago Booth | Bio/Vote History | ||
|
|
||||
|
Xavier Gabaix |
Harvard | Bio/Vote History | ||
|
|
||||
|
Itay Goldstein |
UPenn Wharton | Bio/Vote History | ||
|
|
||||
|
John Graham |
Duke Fuqua | Bio/Vote History | ||
|
|
||||
|
Campbell R. Harvey |
Duke Fuqua | Bio/Vote History | ||
|
It is hard to measure. However, in my experience in talking to very large allocators such as pensions and SWFs, they focus a lot on correlation structure. It is hard to measure "substantial" given we don't have a lot of examples of funds ignoring MPT.
|
||||
|
David Hirshleifer |
USC | Bio/Vote History | ||
|
|
||||
|
Harrison Hong |
Columbia | Bio/Vote History | ||
|
no studies on this issue
|
||||
|
Wei Jiang |
Emory Goizueta | Bio/Vote History | ||
|
|
||||
|
Steven Kaplan |
Chicago Booth | Bio/Vote History | ||
|
|
||||
|
Anil Kashyap |
Chicago Booth | Bio/Vote History | ||
|
So many other factors matter for this.
|
||||
|
Ralph Koijen |
Chicago Booth | Bio/Vote History | ||
|
|
||||
|
Camelia Kuhnen |
UNC Kenan-Flagler | Bio/Vote History | ||
|
|
||||
|
Andrew Lo |
MIT Sloan | Did Not Answer | Bio/Vote History | |
|
|
||||
|
Michelle Lowry |
Drexel LeBow | Bio/Vote History | ||
|
|
||||
|
Sydney Ludvigson |
NYU | Bio/Vote History | ||
|
|
||||
|
Matteo Maggiori |
Stanford GSB | Bio/Vote History | ||
|
|
||||
|
Gregor Matvos |
Northwestern Kellogg | Did Not Answer | Bio/Vote History | |
|
|
||||
|
Tobias Moskowitz |
Yale School of Management | Bio/Vote History | ||
|
Should be true, but as a field we have not done a great job at measuring resource allocation.
|
||||
|
Stefan Nagel |
Chicago Booth | Bio/Vote History | ||
|
Adoption should have helped ensure that risk that is in principle diversifiable doesn't command risk premia, which in turn should improve capital allocation efficiency, but I'm not sure there is empirical evidence that this has been a substantial effect.
|
||||
|
Jonathan Parker |
MIT Sloan | Bio/Vote History | ||
|
|
||||
|
Christine Parlour |
Berkeley Haas | Bio/Vote History | ||
|
Portfolio theory led to the design of ETFs and mutual funds which increased participation and capital market depth.
|
||||
|
Thomas Philippon |
NYU Stern | Bio/Vote History | ||
|
|
||||
|
Manju Puri |
Duke Fuqua | Did Not Answer | Bio/Vote History | |
|
|
||||
|
Michael R. Roberts |
UPenn Wharton | Bio/Vote History | ||
|
Question is a little ambiguous.
|
||||
|
Paola Sapienza |
Northwestern Kellogg | Bio/Vote History | ||
|
For the reasons, that I exposed in the previous answer, in practice the assumptions are not satisfied, so empirically the results of the model depend on those assumptions being met or violated.
|
||||
|
Amit Seru |
Stanford GSB | Bio/Vote History | ||
|
|
||||
|
Robert Stambaugh |
UPenn Wharton | Bio/Vote History | ||
|
Index funds apply the advice of Markowitz (1952, JF): diversify, especially across industries. Active quant funds often make covariance-conscious portfolio decisions. Net effects on price discovery and capital allocation seem hard to identify..
|
||||
|
Laura Starks |
UT Austin McCombs | Bio/Vote History | ||
|
|
||||
|
Jeremy Stein |
Harvard | Bio/Vote History | ||
|
|
||||
|
Johannes Stroebel |
NYU Stern | Bio/Vote History | ||
|
|
||||
|
Amir Sufi |
Chicago Booth | Bio/Vote History | ||
|
I am not sure what "efficiency" means in this statement.
|
||||
|
Sheridan Titman |
UT Austin McCombs | Bio/Vote History | ||
|
The modern portfolio approach has probably improved the informational efficiency of markets but the effect on capital allocation is likely to be modest.
|
||||
|
Stijn Van Nieuwerburgh |
Columbia Business School | Bio/Vote History | ||
|
Consideration of the best risk-adjusted investment opportunities in capital budgeting should have improved the efficient allocation of capital
|
||||
|
Toni Whited |
UMich Ross School | Bio/Vote History | ||
|
|
||||
