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
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.
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
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