Summary of Getting Back to Business

Daniel Peris

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Markets have long recognized Modern Portfolio Theory (MPT) as the dominant governing thesis in investing. MPT advocates diversification and quantifies risk as a function of anticipated market returns. But investment expert Daniel Peris casts a critical eye on MPT. His astute examination focuses on understanding how and why the model emerged, its perceived failures, and the future of the industry’s investment approach. Peris convincingly argues that MPT has distorted the investment framework and seriously damaged stakeholders. All investors – whether beginners or pros – will find Peris’s work on a foundational element of modern investing an important addition to their reference libraries.

About the Author

Daniel Peris is a senior vice president and senior portfolio manager at Federated Investors. He is the author of The Strategic Dividend Investor and The Dividend Imperative.

Summary

Modern Portfolio Theory

In any discipline, theories, rules, principles and models serve as the foundation by which professionals can understand, study and advance the subject matter. Investing is no different. Pioneering economist Harry Markowitz introduced Modern Portfolio Theory (MPT) to the investment lexicon in the 1950s, and investors and industry stakeholders have followed its core tenets ever since. Despite the rise of algorithms, program trading and technology innovations, MPT continues to exert an almost monopolistic hold on the way investors deploy capital.

MPT’s principles flow from the premise that investors should diversify their assets in order to balance risk with overall return. In tandem, investors use a 1960s creation, the capital asset pricing model (CAPM), as a tool to calculate the relationship between portfolio returns and assumed market risk. Despite its prominence, some experts believe MPT’s record in delivering superior results has fallen far short of its promises. They believe the time has come for a replacement method based on the cash flows of companies.

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