The Art of Diversification

Nobel Prize winner Harry Markowitz demonstrated one of the most well-known and influential economic theories in 1952 under the title “Portfolio Selection.” This well known article, featured in the Journal of Finance, focused on the importance of risk and return in relation to diversification and reduction of excess risk within an investment portfolio. At a basic level, Markowitz demonstrated that each security has its own deviation from an expected return, statistically recorded as a standard deviation from the mean, namely referred to as risk. The risk of an overall portfolio should be expected to decrease as the number of securities increase.