Harry Markowitz


Harry Max Markowitz was an American economist who received the 1989 John [von Neumann Theory Prize] and the 1990 Nobel Memorial Prize in Economic Sciences.
Markowitz was a professor of finance at the Rady School of Management at the University of California, San Diego. He is best known for his pioneering work in portfolio theory">Portfolio (finance)">portfolio theory, studying the effects of asset risk, return, correlation and diversification on probable investment portfolio returns.

Biography

Harry Markowitz was born to a Jewish family, the son of Morris and Mildred Markowitz. During high school, Markowitz developed an interest in physics and philosophy, in particular the ideas of David Hume, an interest he continued to follow during his undergraduate years at the University of Chicago. After receiving his Ph.B. in Liberal Arts, Markowitz decided to continue his studies at the University of Chicago, choosing to specialize in economics. There he had the opportunity to study under important economists, including Milton Friedman, Tjalling Koopmans, Jacob Marschak and Leonard Savage. While still a student, he was invited to become a member of the Cowles Commission for Research in Economics, which was in Chicago at the time. He completed his A.M. in Economics from the university in 1950.
Markowitz chose to apply mathematics to the analysis of the stock market as the topic for his dissertation. Jacob Marschak, who was the thesis advisor, encouraged him to pursue the topic, noting that it had also been a favorite interest of Alfred Cowles, the founder of the Cowles Commission. While researching the then current understanding of stock prices, which at the time consisted in the present value model of John Burr Williams, Markowitz realized that the theory lacks an analysis of the impact of risk. This insight led to the development of his seminal theory of portfolio allocation under uncertainty, published in 1952 by the Journal of Finance.
In 1952, Harry Markowitz went to work for the RAND Corporation, where he met George Dantzig. With Dantzig's help, Markowitz continued to research optimization techniques, further developing the critical line algorithm for the identification of the optimal mean-variance portfolios, relying on what was later named the Markowitz frontier. It was also in 1952 that Markowitz published Portfolio Selection, his first paper dissecting investment portfolio strategy.
In 1954, he received a PhD in economics from the University of Chicago with a thesis on the portfolio theory. The topic was so novel that, while Markowitz was defending his dissertation, Milton Friedman argued his contribution was not economics. During 1955–1956 Markowitz spent a year at the Cowles Foundation, which had moved to Yale University, at the invitation of James Tobin. He published the critical line algorithm in a 1956 paper and used this time at the foundation to write a book on portfolio allocation which was published in 1959.
Markowitz won the Nobel Memorial Prize in Economic Sciences in 1990 while a professor of finance at Baruch College of the City University of New York. In the preceding year, he received the John von Neumann Theory Prize from the Operations Research Society of America for his contributions in the theory of three fields: portfolio theory; sparse matrix methods; and simulation language programming. Sparse matrix methods are now widely used to solve very large systems of simultaneous equations whose coefficients are mostly zero. SIMSCRIPT has been widely used to program computer simulations of manufacturing, transportation, and computer systems as well as war games. SIMSCRIPT included the Buddy memory allocation method, which was also developed by Markowitz.
He was elected to the 2002 class of Fellows of the Institute for Operations Research and the Management Sciences.

CACI

The company that would become CACI International was founded by Herb Karr and Harry Markowitz on July 17, 1962, as California Analysis Center, Inc. They helped develop SIMSCRIPT, the first simulation programming language, at RAND and after it was released to the public domain, CACI was founded to provide support and training for SIMSCRIPT.
In 1968, Markowitz joined Arbitrage Management company founded by Michael Goodkin. Working with Paul Samuelson and Robert Merton he created a hedge fund that represents one of the first known attempts at computerized arbitrage trading. He took over as chief executive in 1970. After a successful run as a private hedge fund, AMC was sold to Stuart & Co. in 1971. A year later, Markowitz left the company.
Years later, he was involved with CACI's SIMSCRIPT addition of Object-oriented features.

Post-CACI

Markowitz divided his time between teaching ; video casting lectures; and consulting. He served on the advisory board of SkyView Investment Advisors, a traditional and alternative investment advisory firm. Markowitz also served on the Investment Committee of LWI Financial Inc., a San Jose, California-based investment advisor; on the advisory panel of Robert D. Arnott's Newport Beach, California based investment management firm, Research Affiliates; on the advisory board of Mark T. Hebner's Irvine, California and internet based wealth management and taxes firm, Index Fund Advisors; and as an advisor to the Investment Committee of 1st Global, a Dallas, Texas-based wealth management and investment advisory firm. Markowitz advised and served on the board of ProbabilityManagement.org, a 501 non-profit that aims "to reshape the communication and calculation of uncertainty."
Markowitz was co-founder and Chief Architect of GuidedChoice, a 401 managed accounts provider and investment advisor. Markowitz's more recent work included designing the backbone software analytics for the GuidedChoice investment solution and heading the GuidedChoice Investment Committee. He was actively involved in designing the next step in the retirement process: assisting retirees with wealth distribution through GuidedSpending.
In 2018 Markowitz donated his Nobel Prize medal and diploma to the Geisel Library of the University of California, San Diego due to his "love for the campus and the joy he out of teaching" at the Rady School of Management. He died on June 22, 2023, at the age of 95. He died in a hospital in San Diego, California due to complications from pneumonia and sepsis.

Research and Economic Contributions

Mean-Variance Analysis

Markowitz's primary contribution was the formalization of the risk-return trade-off. He mathematically demonstrated that an investor can reduce the standard deviation of a portfolio by choosing assets that are not perfectly correlated.
The Expected Return of the portfolio is:
The Portfolio Variance, which incorporates the correlations between assets, is:

The Efficient Frontier

A Markowitz-efficient portfolio is one where diversification cannot lower the portfolio's risk for a given return expectation. The set of all such portfolios forms the **Markowitz Efficient Frontier**.
The Optimization Problem To find the optimal weights that minimize the portfolio variance for a specific required target return :
subject to the constraints:
  1. Target Return:
  2. '''Budget Constraint:'''

Selected publications

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