Markowitz Revisited: Mean-Variance Models in Financial Portfolio Analysis

Abstract

Mean-variance portfolio analysis provided the first quantitative treatment of the tradeoff between profit and risk. We describe in detail the interplay between objective and constraints in a number of single-period variants, including semivariance models. Particular emphasis is laid on avoiding the penalization of overperformance. The results are then used as building blocks in the development and theoretical analysis of multiperiod models based on scenario trees. A key property is the possibility of removing surplus money in future decisions, yielding approximate downside risk minimization.