Monday, September 12, 2011

Modern Portfolio Theory vs. Value Investing

In my Capstone portion of my masters degree at Johns Hopkins I am learning that an optimal portfolio can be constructed by looking at the beta of the firm.  This I already knew....

After being a member of the Equity Analyst Team and looking at how the two of the greatest investors of all time (Benjamin Graham and Warren Buffett) construct their investment portfolio's I'm not so sure if MPT is the best course of route.  I calculated beta for 10 stocks using regression analysis, diversified the portfolio, confirmed using a correlation matrix I constructed, and most importantly I made sure that the firms I picked were within the realm of how the MPT is supposed to be utilized. 

With that being said, I also looked at the various investment funds which follow the MPT and needless to say I wasn't impressed.  The Equity Analyst Team and I will drill into this further this coming weekend and see why many funds who follow the MPT tend to under perform the market.
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