In investments, portfolio diversification may be the only free lunch. But does it really work?
The global crisis that began in 2008 has called into question many of the basic assumptions and central tenets of Modern Portfolio Theory (MPT). The result is that the benefits of portfolio diversification, the discipline of adhering to a strategic asset allocation policy, and other practical implications of MPT are being challenged. After providing a brief overview of traditional MPT--first developed by Harry Markowitz in 1952, and enhanced in the following decades by numerous scholars and financial economists, including William Sharpe, Robert Merton, and Eugene Fama--Dr. Peng Chen, CFA, will address two key questions:
1. Are asset allocation and portfolio diversification still valid?
2. How should asset allocation and portfolio diversification be implemented in a non-normal world?