Book Review: Modern Portfolio Theory by Jack Clark Francis and Dongcheol Kim

Journal of Financial Management and Analysis Vol. 26 (2), 2014

Posted: 2 Apr 2014

See all articles by M. R. K. Swamy

M. R. K. Swamy

Om Sai Ram Centre for Financial Management Research

Date Written: March 28, 2014

Abstract

Modern Portfolio Theory (MPT) which was introduced by Harry Markowitz’s seminal paper “Portfolio Selection” over sixty years ago, has stood the test of time, Markowitz won Nobel Prize for introducing portfolio theory, followed by Professors James Tobin (Yale) and Bill Sharpe (Stanford) who won Nobel Prizes for important extensions to Markowitz’s original model. Today, the theory has grown to impact every aspect of academic finance and many parts of economics. This book, Modern Portfolio Theory, presents a comprehensive picture of modern portfolio theory in a manner that can be used by undergraduate and graduate students and finance practitioners.

While this book uses mathematical and statistical explanations in its coverage of models and other subjects, the material is presented in a way that is understandable to a wide range of readers -- from finance veterans to those just entering the field -- and supplemented with graphs. Also, the book includes a website that provides downloadable algorithms to do portfolio analysis and print solutions in coloured graphs.

The co-authors have also created accompanying Excel spreadsheets that compute Markowitz efficient frontiers under various assumptions and circumstances. This user-friendly software is available online and can be easily downloaded. In addition, an Instructors Manual full of solved problems can be found on Wiley’s Global Education website.

Divided into six comprehensive parts, MPT addresses various aspects of portfolio analysis by tracing the contributious made by different people in the decades since MPT was created. Inasmuch as latest developments in the area of portfolio theory and management published by noted corporate finance experts in the prestigious finance and economics refereed journals like Public Finance; Zeitshrift für Nationalokönomie, Banca Finanza,etc., are not referred to by the authors of MPT and to this extent the title Modern Por tfolio Theory, in my opinion, robs the usefulness of MPT -- It is hard to find references to important contributions by Anglo-Saxon financial economists and practitioners (espcially contributions by Austrian, German, Italian, French corporate finance economists). It is surprising the authors have depended very heavily on literature/periodicals published in the USA.

The usefulness of MPT would be enhanced if the following points may be considered : arrangement of finance, correct/prudent usage, dividend policy, investment (pre-investment stages and post-investment stages), dividend policy incorporating macro economic parameters. The profitability of the entire organisation is vital for longterm sustainability which can be ensured only by optimum usage of available finance in the short-run, medium and long-term. Scenarios of favourable and unfavourable structural maladjustment (business) trends are projected for future planning. These tools should be vibrant enough to sense changes in the Inter-Bank Offered Rates (IBORs) with which the cost of finance is linked in addition to following topics with emphasis on the following important crucial topics: Insider trading & risk management with emphasis on weighting methods; Political risk analysis; Activity based/cost based accounting; Investment cycle analysis -- impact of ‘Punctured Investment Cycle Tyre’ on portfolio management, etc.

Suggested Citation

Swamy, M. R. K., Book Review: Modern Portfolio Theory by Jack Clark Francis and Dongcheol Kim (March 28, 2014). Journal of Financial Management and Analysis Vol. 26 (2), 2014, Available at SSRN: https://ssrn.com/abstract=2419210

M. R. K. Swamy (Contact Author)

Om Sai Ram Centre for Financial Management Research ( email )

Mumbai
India

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