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  • Posted By: sohogirl
  • Date Posted: 11/22/2010
  • Category: Others
  • Words: 862
  • Pages: 4
  • Views: 771
  • Rank: 234

Against the Gods

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Against the Gods

Through all the years of stocks, people never thought of defining risk with numbers. It was never about a definition, but about the feeling in your gut when you see that your risk was rising. In the world of Stocks there are two types of people; the ones who stand by risk and the ones who lean on security. The aggressive and the faint-hearted. The young man, who separated these, weak from strong, wrote an article in June 1952, to the Journal of Finance. This man, Harry Markowitz, an unknown 25-year-old graduate student at the University of Chicago, wrote a fourteen-page article titled “Portfolio Selection.” Markowitz was dealing with a subject ‘considered too dicey and speculative for sober academic analysis.’ He was writing for the big boys.


Immediately Markowitz decisively pinpoints his objectives, stating that ‘an investor should not select securities based on their individual properties, but based on how they fit into the whole of the portfolio.’ In other words, the risk of a prospective security is irrelevant to the investment decision, it is only the degree to which the addition of this security raises the risk of the portfolio as a whole that should be considered. This is an important perspective, since it is quite possible for an extremely unpredictable security to add very little risk to a portfolio when it is "uncorrelated" with the securities already in the portfolio. In other words, since the individual securities do not move together, some of the movement of each is "washed out" by the movement of the others. These happenings are very unreliable to predict and nowhere near able to control. Stocks, bonds, saving accounts, and each investor’s returns depend on this, risk. However they are still able to manage the risks that they take. The higher ...

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