Tuesday, March 14, 2006


Portfolio Theory

Introduced by Harry Markowitz in 1952 (Markowitz, H. M. (1952). Portfolio Selection, Journal of Finance, Vol. 7, Iss. 1, p. 77-91.), modern portfolio theory, involves "detailing the mathematics of diversification". Markovitz proposed that "investors focus on selecting portfolios based on their overall risk-reward characteristics instead of merely compiling portfolios from securities that each individually have attractive risk-reward characteristics".

More on Modern Portfolio Theory.

A couple of areas of interest:

One interesting application of this very useful theory that I have come acrosss is in an analysis of state revenues and the use of a lottery to diversify the public revenue stream (quite ingenius and due for an update). Theoretically, recognizing the ability for a gaming service (as provided by the state or licensed or taxed) revenue stream to diversify the whole public revenues portfolio might be enough of a motivation for the growth of state-run lotteries in the United States since 1964.

Additionally, I was thinking about this last night -- diversifying the revenues from public and private clients at nursing home facilities. This could easily include hospitals, emergency rooms, and any other medical services or health facilities. Not only is this a big topic currently, with increases in regulation over the nursing home facilities, but it would be an interesting approach used to maximize return while minimizing risks. Due to the growing public funds used in nursing homes (LTC), this would also give policy analysts an idea of the revenue breakdown (expansion of public/private funds, needed to effectively diversify their clientele portfolio).

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