Summary of a reading Outline Example | Topics and Well Written Essays - 500 words

Summary of a reading - Outline Example e1930s, the scars of World War II, and presence of unscrupulous players in the market coupled with legal restrictions kept the general public away from the stock market in the 1950s. A.D.Roy’s paper titled â€Å"Safety First and the Holding of Assets† published three months after Markowitz’s paper appeared in the Journal of Finance, discussed the same lines of arguments, but did not evoke any response. After earning his undergraduate degree in economics, Markowitz continued his graduate work while serving as a Research Associate at the Cowles Commission. He chose stock market as the subject of his doctoral dissertation in consultation with Jacob Marschak (director of Cowles Commission) and Marshall Ketchum (Dean of the Graduate School of Business). The Theory of Investment Value by John Burr Williams fascinated him, but it struck him that people should consider risk as well as return while making investment decisions. So he applied Tjalling Koopmans’ (Prof. of Economics at Chicago University) linear programming technique for solving problems of resource allocation under constraints, to analyze the choices facing an investor who must decide between seeking high returns and attempting to hold down risk at the same time. Diversification protects the investor from losing everything in one swoop. At the same time it reduces the opportunity of earning high returns by concentrating investment in one stock which appears to be the best. Markowitz followed the idea of the tension between risk and return and between diversification and concentration down two separate tracks. The first track, the subject of his 1952 article, tells the investor how to apply the trade off between risk and reward in selecting a portfolio, by applying Koopmans’ linear programming. The second track tells how each investor should go about selecting the single portfolio that most closely conforms to the investor’s goals. This aspect is treated at length in Markowitz’s book, Portfolio