1. Professor Markowitz won the Nobel Prize in 1990 for his research in the field of economic portfolio theory.

His Portfolio Theory is based on empirical sizes, which analyze the connection between risk and return. In the Markowitz Theory, risk is calculated with the help of variance. Additionally, the standard deviation serves as an equivalent measure of risk. Markowitzs model insinuates that the investors make their investment decisions based on returns and the risk spread. Moreover, the correlation between the investment and the index is still made with the help of linear regression and analyzed with the correlation coefficients. 2. Markowitz built his theory on the following assumptions: An investor has a certain amount of capital he wants to invest over a single time horizon. He can choose between different investment instruments, like stocks, bonds, options, currency, or portfolio. The investment decision depends on the future risk and return. The decision also depends on if he or she wants to either maximize the yield or minimize the risk. 3. The investor is only willing to accept a higher risk if he or she gets a higher expected return. Additionally, the theory does not include transaction costs or tax. This means that the markets are perfectly efficient. 4. If one analyzes total risk, then one could distinguish between systematic risk (which cannot be eliminated) and non-systematic risk (which can be eliminated by diversification). The systematic risk is also known as market risk. It does not just concern a special asset or single issue; it concerns the complete plant category and economic environment. Some examples are interest rate levels, wage levels, exchange rates, legislation like tax reform unemployment, and inflation. The systematic risk is measured by the beta factor, which shows the relationship between the performance of a share and the market index. It connects the return of the single asset with the return of the appropriate total market (index). The non-systematical risk involves special risk, which is not connected to other risks. This risk only concerns certain assets. Such risks are involved in industry business cycles like strikes, negative press reports about a line of business, and credit rating risks. As mentioned earlier, these nonsystematical risks can be minimized or even eliminated by diversification. 5. In addition, the degree of the reduction of the risk by diversification depends on the variance of the different assets, particularly from the correlation between the investment instruments and its weight in the portfolio.

6. The bigger the share of the uncorrelated assets in a portfolio, the more successful the elimination of the non-systematic risk. Diversification can also be made by an investment in internationally diversified mutual funds, American Depository Receipts or American shares. 7. Diversification on the international level pushes out the efficient. Therefore, as investors wisdom dictates, Dont put all your eggs in one basket. The Markowitz (Efficiency) Frontier represents different portfolios that provide a certain level of risk a maximum rate of return. The investors choose their personal portfolio along the efficient frontier curve depending on individual attitudes toward the risk. Nevertheless, the Markowitz portfolio theory is criticized by many economists. First, they argue that the forecasts are inaccurate because they refer to historical data. Therefore, the biggest critique is that one cannot predict the future. Estimation errors at the evaluation of the future returns have enormous effects on the Mean-Variance optimization and the Asset Allocations. Second, in reality, the returns are not normally distributed. Third, it takes a lot of effort to evaluate the data. For example, for 100 securities one to need to uncover 5000 values and solve about 100 equations.5 Nevertheless, the Markowitz Portfolio-Theory is regarded a sound theory.

Controversy
MPT is based on several assumptions that have been dismissed. Regular stock market crashes and the boom-and-bust nature of economics show that investors can shift between irrational exuberance and sheer panic within 24-hour periods. Also, many stocks, businesses and property ventures can be bought for less than book value at any moment, demonstrating the idea that buyers and sellers are either far from rational or lack information. Investors such as Warren Buffett, Peter Lynch and Benjamin Graham built their careers while rejecting the theory.