Before writing on our upcoming portfolio manager solution, I feel fair to pay a little tribute to the giants whose shoulders we are standing on, and who made possible to create powerful digital solutions even when digital was just a concept, far away in time.
Birth of Modern Portfolio Theory
Such theory was developed by Harry Markowitz, American economist that published his seminal work Portfolio Selection in the March 1952 issue of the Journal of Finance. He won the John von Neumann Theory prize in 1989 and the Nobel prize in 1990.
Modern Portfolio Theory, says Wikipedia (so we can keep it really simple), is…
a mathematical framework for assembling a portfolio of assets such that the expected return is maximized for a given level of risk, defined as variance. Its key insight is that an asset’s risk and return should not be assessed by itself, but by how it contributes to a portfolio’s overall risk and return.
And Its Evolution
The Black-Litterman model comes from development work at Goldman Sachs, started in 1990, that was published in 1992. Its authors are Fischer Black and Robert Litterman. Let’s stay tuned on Wikipedia to give the simplest definition possible of it:
The model starts with the equilibrium assumption that the asset allocation of a representative agent should be proportional to the market values of the available assets, and then modifies that to take into account the ‘views’ (i.e., the specific opinions about asset returns) of the investor in question to arrive at a bespoke asset allocation.
Fischer Black didn’t unfortunately live long enough to win the same Nobel prize of his colleagues in 1997, while Robert Litterman retired in 2009, after 23 years of career in Goldman, and today serves on the boards of seven organizations.
They Solved the Problem; We Made a Solution
It took us several man-months to build a good portfolio optimization solution, but we did it. The works from Markowitz and Black-Litterman were instrumental to start from a good mathematical basis; we worked out algorithms, user experience, multichannel capabilities, everything that makes the difference between a simple solution and a solution from Objectway.
We’re proud of the results because we’ve been swift and sharp in designing our solution.
In a forthcoming installment we’re going to talk more about Portfolio Optimizer. In the meantime, we want to thank Harry, Fischer, and Robert for what they did for us.