MODERN PORTFOLIO THEORY

Modern Portfolio Theory was first introduced by economist, Dr. Harry M. Markowitz in 1952, when he authored "Portfolio Selection" for the Journal of Finance.

In 1990, Dr. Markowitz won the Nobel Prize for his contributions to financial economics. Although economists had long understood the common sense of portfolio diversification, what Dr. Markowitz demonstrated was how to measure the risk of various securities, and how to combine them in a portfolio to achieve maximum return for a given risk.

The concept of Modern Portfolio Theory was further advanced by Harvard professor, Dr. John Litner, in his 1983 study, "The Potential Role of Managed Commodity Financial Futures Accounts In Portfolios of Stocks and Bonds." His conclusion:

    "Portfolios...including judicious investments... in leveraged managed futures accounts show substantially less risk at every possible level of expected return than portfolios of stocks (or stocks and bonds) alone."

Today, a variety of academic evidence demonstrates the potential benefit of using managed futures to create a better balance to a stock and bond portfolio.

In a study by Goldman Sachs, covering a 25 year period, they concluded that by:

    "allocating only 10% of a securities portfolio to commodities, investors can vastly improve their performance."

Another study by the Chicago Mercantile Exchange, one of the world's largest futures exchanges, stated:

     "Portfolios with as much as 20% of assets in managed futures yielded up to 50% more than a portfolio of stocks and bonds alone."

Although futures investments involve risk, simple common sense suggests that qualified investors should consider including managed futures as a reasonable portion of a well balanced portfolio.


 

Source:  Chart derived from statistics presented in the Chicago Mercantile Exchange’s Q&A Report on Managed Futures, 1993 edition page 4.

THE IMPACT OF PORTFOLIO DIVERSIFICATION

The Chicago Board of Trade's publication, "Managed Futures, Portfolio Diversification Opportunities" shows a portfolio with the greatest risk and least returns was compromised of 55% stocks, 45% bonds and 0% managed futures, while a portfolio comprised of 45% stocks, 35% bonds and 20% managed futures exhibited the greatest returns and least risk.

The risk of trading futures, options and foreign exchange can be substantial. Past performance is not necessarily indicative of future results. The factual information of this report has been obtained from sources believed to be reliable, but is not necessarily all inclusive and its accuracy can not be guaranteed.

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