The document discusses the Markowitz portfolio model introduced by Harry Markowitz in March 1952, emphasizing the importance of stock return correlation and expected returns in portfolio management. It highlights how diversification can minimize portfolio risk, particularly unsystematic risk, and provides insights on optimizing portfolios while balancing risk and return preferences for investors. The model suggests that holding multiple securities is generally less risky compared to a single stock, appealing to risk-averse investors.

1. Portfolio Markowitz Model
• Harry Markowitz
• Article in Journal of Finance in March 1952
• Importance of Correlation among the different stocks’ returns
• Also Showed level of expected return in group of securities,
one security dominates the other
• Knowledge of the correlation coefficient between all possible
securities combination is required
• “ Markowitz algorithms “ to minimise the portfolio variance

2. Simple Diversification
• Portfolio risk reduced by the simple diversification
• Assets may Vary from stocks to different types of bonds
• Diversification reduces the unsystematic risk or unique risk

3. Problems of vast Diversification
• Purchase of poor performers
• Information inadequacy
• High research cost
• High transaction cost

4. The Markowitz Model
Holding 2 Stocks is less risky than holding one stock
Example : Textile
Building optimal portfolio is very difficult
Markowitz Provides an answer for this

5. Assumptions
• The Individual Investor estimates risk on the basis
of Variability of returns ie. the variance of returns
• Investor’s decision is solely based on the expected
return and variance of returns only
• For given level of risk, investor prefers higher
returns to lower return likewise, for a given level of
return investor prefers lower risk than higher risk

6. The Concept
• Markowitz had given up the single stock portfolio and
introduced diversification
• Single security - preferable if expectation of highest return tend
to be real
• In the world of uncertainty, most of the risk averse investors
would like to join Markowitz rather than keeping a single stock
because diversification reduced the risk

8. Thank You