American Finance Association

Portfolio Selection Author(s): Harry Markowitz Reviewed work(s): Source: The Journal of Finance, Vol. 7, No. 1 (Mar., 1952), pp. 77-91 Published by: Wiley-Blackwell for the American Finance Association Stable URL: http://www.jstor.org/stable/2975974 . Accessed: 10/10/2012 22:46
Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at . http://www.jstor.org/page/info/about/policies/terms.jsp

.
JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact support@jstor.org.

Wiley-Blackwell and American Finance Association are collaborating with JSTOR to digitize, preserve and extend access to The Journal of Finance.

http://www.jstor.org

PORTFOLIO SELECTION* MARKOWITZ HARRY

The Rand Corporation

intotwostages. maybe divided a portfolio OFSELECTING THE PROCESS and endswith and experience withobservation stagestarts The first The of available securities. performances beliefsabout the future performances aboutfuture beliefs withtherelevant secondstagestarts Thispaperis concerned withthe ofportfolio. and endswiththechoice does(orshould) theinvestor therulethat consider We first second stage. This ruleis reor anticipated, returns. maximize discounted expected, to guideinand as a maximum to explain, jectedbothas a hypothesis does(or therulethattheinvestor We next consider behavior. vestment ofrea desirable and variance thing return expected should)consider bothas a This rulehas manysoundpoints, an undesirable thing. turn behavior. We illustrate and hypothesis about,investment maxim for, accordand choiceofportfolio beliefs relations between geometrically of returns" rule. returns-variance the to "expected ing choiceofportfolio is thattheinvestor One typeofruleconcerning the discounted (or capitalized)value of does (or should) maximize it must withcertainty, is notknown Sincethefuture returns.1 future Variations we discount. or "anticipated" returns which be "expected" Hicks,we could let Following of thistypeof rulecan be suggested. an for risk.2 Or,we couldlet include allowance returns "anticipated" from securities the returns rate at we particular which capitalize the risk. varywith (or maxim) that the investordoes (or should) The hypothesis imIf we ignore market discounted return mustbe rejected. nmaximize there is a diversified that the never rule implies foregoing perfections Diversito all non-diversified portfolios. is preferable which portfolio does a of observed rule behavior which is both and sensible; fication as a both be rejected of must thesuperiority diversification notimply and as a maxim. hypothesis
* This paper for Commission at theCowles while donebytheauthor is basedonwork oftheSocialScienceResearch assistance and withthefinancial in Economics Research No. 60. Paper,NewSeries, Commission as Cowles It willbe reprinted Council. Mass.: Value(Cambridge, TheTheory ofInvestment J.B. Williams, example, 1. See,for Harvard Press, 1938), pp. 55-75. University p. 126. 1939), Press, University 2. J.R. Hicks,ValueandCapital(NewYork:Oxford thana portfolio. rather theruleto a firm Hicksapplies

77

78

of Finance The Journal

no matter diversification howthe rulefailsto imply The foregoing discount thesameordifferent whether are formed; returns anticipated how thesediscount no matter securities; ratesare used fordifferent The hypothesis ratesare decideduponor how theyvaryovertime.3 in the security withthe places all his funds implies thatthe investor thesamevalsecurities value.If twoormore discounted greatest have, of theseis as good as any ue, thenany of theseor any combination other. areN securities; letrB be supposethere We can see thisanalytically: decided upon) at timet perdollarinreturn (however theanticipated on theOh i; let d be therate at whichthe return vestedin security let Xi be therelabackto thepresent; at timet is discounted security 0 sales,thusXi O insecurity i. We exdudeshort invested tiveamount is oftheportfolio forall i. Then thediscounted return anticipated
oo
N

R=3

t=1

i=1

di,t itX

i=l

XiEdit

t=l

rit)

= E di ritis thediscounted therefore oftheith security, return RX

t=1

of Xi. Since Xi 3 0 forall i R = YXiRi whereRi is independent = of withtheXi as non-nega1, R is a weighted average RX and 2Xi = fori withmaximum 1 To maximize R, we let Xi tiveweights. Ri. with then any allocation If severalRaa, a = 1, ..., K are maximum Xaa = 1 E a=1 to all nonR. In no case is a diversified preferred portfolio maximizes diversified portfolios. a staticmodel.Inat thispointto consider It willbe convenient fromthe ih security of the timeseriesof returns stead of speaking as a wholeis the portfolio from The flowof returns the iP security.
(ril, ri2,... , rit,. . .) we will speak of "the flow of returns" (ri) from
K

and discount thatthe anticipated returns on theassumption depend 3. The results oftheparticular investor's portfolio. ratesareindependent of money amount wouldbe placedin the an infinite saleswereallowed, 4. If short with r. highest security

Selection Portfolio

79

to maximize wished case iftheinvestor As in thedynamic R = 2X,Xr. in all he wouldplace his funds from theportfolio return "anticipated" returns. anticipated withmaximum thatsecurity shoulddiversify boththattheinvestor implies Thereis a rulewhich The rulestatesthatthe return. maximize expected and thathe should amongall thosesecurities hisfunds does (orshould)diversify investor will The law oflargenumbers return. expected givemaximum which willbe almostthesameas thattheactualyieldoftheportfolio insure returnsThisruleis a specialcase oftheexpected yield.5 theexpected below).It assumesthatthere ofreturns rule(to be presented variance andminimum return expected maximum givesboth is a portfolio which to theinvestor. thisportfolio and it commends variance, appliesto a portthatthelaw of largenumbers This presumption, are from securities cannotbe accepted.The returns folioof securities, all variance. eliminate cannot Diversification too intercorrelated. the is notnecessarily return expected withmaximum The portfolio can theinvestor Thereis a rateat which variance. minimum onewith bygivorreducevariance on variance, by taking return gainexpected return. ingup expected ruleis inreturns or anticipated returns We saw thattheexpected of rereturns-variance the expected adequate.Let us now consider elementary a few first present to (E-V) rule.It willbe necessary turns We will thenshow statistics. of mathematical and results concepts itsplausidiscuss this will After we oftheE-V rule. someimplications bility. statemathematical to avoidcomplicated we try In ourpresentation and ofrigor is paid in terms a price As a consequence andproofs. ments from thissourceare (1) we do not limitations The chief generality. case; instead,we forthe n-security deriveour resultsanalytically cases; (2) weassume for the3 and4 security geometrically them present we mustrecognize presentation In a general beliefs. staticprobability is a securities ofthevarious ofyields distribution thattheprobability thegenin thefuture, to present, intends oftime.The writer function theselimitations. removes which treatment eral,mathematical conceptsand resultsof elementary We will need the following statistics: mathematical by valueis decided whose i.e.,a variable variable, Let Y be a random that Y can take on a of exposition, chance.Suppose,forsimplicity that Y = ofvaluesyi, y2, .. , YN. Let theprobability finite number
op. cit.,pp. 68, 69. 5. Williams,

80 to be defined

of Finance The Journal

value (ormean)of Y is yi, be Pi; thatY = y2be p2 etc. The expected

E=Plyl+p2y2+.
* *+PNYN

to be of Y is defined The variance

V = p1(y1-E) 2+ P2(y2-E) 2+.

. +PN (YN-E) 2

itsexpected value. V is a deviation of Y from V is theaveragesquared of dispersion, Othermeasures of dispersion. commonly used measure o-= -VV and thecodeviation, to V are the standard related closely alE. ofvariation, efficient Suppose we have a numberof randomvariables: R1, . . . , R,. If R is oftheRi sum (linearcombination) a weighted + a2R2+. aLiRi
.

. + a.R.

R is also a random variable. R1,maybe thenumber (Forexample then die,and R the sumof whichturns up on one die; R2,thatof another In thiscase n = 2, a, = a2 = 1). thesenumbers. forus to knowhow the expectedvalue and It willbe important dissum (R) are relatedto the probability varianceof the weighted We state these relationsbelow; we refer tribution of the R1, . . . , R,n. textfor to anystandard proof.6 thereader sum of the sum is theweighted value of a weighted The expected expected values. I.e., E(R) = alE(Ri) + a2E(R2) + . . . + anE(Rn) it we must To express sumis notas simple. ofa weighted The variance ofR1and R2 is The covariance define "covariance."
o12=E
I

[R1-E (R1)I [R2-E (R2) I I

of R1 from its mean) times value of [(thedeviation i.e., theexpected thecovariofR2 from its mean)].In general we define (thedeviation ance between Ri and Rj as crijE I [R -E (Ri) ] [R -E (Rj) I } coefficient in terms of the familiar correlation O'i may be expressed between correlation) Ri and Rj is equal to [(their (pi2). The covariance of deviation ofRj) times(thestandard deviation times(thestandard
Rj)]T
(NewYork:McGrawtoMathematicalProbability Introduction 6. E.g.,J.V. Uspensky, 9, pp. 161-81. chapter Hill,1937),

Selection Portfolio sumis ofa weighted The variance V (R)

N

8i

=
i=1

a2

V (Xi) +2

N i=1

NI

t>1

aia

jaij

If we use thefactthatthevariance ofRi is oi then

V (R)

aiajxij

value be the expected Let Aui on theith security. Let Ri be thereturn between ofRi; oij,be thecovariance Ri and Rj (thusoii is thevariance are alassetswhich oftheinvestor's ofRi). Let Xi be thepercentage as a whoieis The yield(R) on theportfolio locatedto thei1k security. R-=RiXi to be random variables.7 R) are considered The Ri (and consequently Since by theinvestor. but are fixed variables, The Xi are notrandom we willexwe have 2Xi= 1. In our analysis theXi are percentages sales); therefore valuesoftheXi (i.e.,short cludenegative Xi I 0 for all i. is a weighted as a whole sumofranThe return (R) on theportfolio can choosetheweights). Fromour theinvestor domvariables(where E return sumswe see that the expected of suchweighted discussion as a wholeis from theportfolio
N

= 1

is and thevariance
V=
i-1

oEijxix
j-1

beliefs does (and should) act as ifhe had probability 7. I.e., we assumethattheinvestor thesevariables.In generalwe would expectthat the investorcould tell us, for concerning A morelikelythan B, B more considered he personally any two events(A and B), whether in his opinionson such wereconsistent likelythanA, or both equally likely.If the investor beliefs.We cannot expect the investor he would possess a systemof probability matters, to be consistentin every detail. We can, however,expect his probabilitybeliefsto be considered.We should on important mattersthat have been carefully roughlyconsistent beliefs-even thoughthey also expectthat he will base his actionsupon theseprobability be in part subjective. do (or should) form the difficult This paper does not consider questionof how investors theirprobabilitybeliefs.

82

of Finance The Journal

has a choiceofvaribeliefs probability For fixed (pi, aij) theinvestor on his choice of portfolio of E and V depending ous combinations X1,... , XN. Supposethattheset of all obtainable(E, V) combinawould tions wereas in Figure1. The E- V rulestatesthattheinvestor to the give rise which portfolios oneofthose (or should)wantto select with those the i.e., figure; as efficient in indicated (E, V) combinations less. V or for given E maximum V for givenE or moreand minimum of efficient the set we can compute by which Thereare techniques associatedwithgivenAi and efficient (E, V) combinations portfolios
v

a~~~~~ffa;'nable E,V combinations

/"~

E,V combinations

~~~~~~~~~~~~~fficient

E
FIG. 1

thesetechniques here.We will,however, and aio.We willnotpresent forcases surfaces the natureof the efficient illustrate geometrically is small. ofavailablesecurities) in which N (thenumber be of practical possibly surfaces might The calculation of efficient and statistical are ways,by combining techniques use. Perhapsthere beliefs(ii, to form reasonable of experts, probability the judgment to computethe attainableefficient oij). We could use thesebeliefs ofwhat(E, V) of (E, V). The investor, beinginformed combinations he desired. We could couldstatewhich combinations wereattainable, combination. theportfolio which thenfind gave thisdesired

Selection Portfolio

83

it wouldbe pracbefore least-mustbe satisfied Two conditions-at the above. First, described manner in the surfaces ticalto use efficient we Second, E-V maxim. to the act to according must desire investor to these return We will and at reasonable mustbe able to arrive pi o,j. matters later. In thethree case security thecase ofthree securities. Let us consider to ourmodelreduces 1) 2) E =EXil4 V =iXjaij
i=l 3 3

j=l

3)
4) From (3) we get

EXi=1
i-1

XiO

for

i=1,2,3.

3')

X3=1-X1-X2

(3') inequation(1) and (2) wegetE and V as functions Ifwesubstitute we find ofX1 and X2. For example
It)

E = 3 +Xl

(Al

-A3)

+ X2 (A2 - A)

here(thatof V is givenbeare not too important The exactformulas write low).8We can simply E -E (X1, X2) a)
b)
C)

V(XI,

X2) X1X2)>'0

XI,>0,

X2)(), 1iI-

(a), (b), (c), we can workwithtwo dimensional By usingrelations geometry. which consistsof all portfolios The attainableset of portfolios constraints (3) and (4)). The at(c) and (3') (or equivalently satisfy abcin ofX1,X2 are represented by the triangle tainablecombinations because oftheX2 axis is notattainable 2. Anypointto theleft Figure thatX1 ) 0. AnypointbelowtheX1 axis is it violatesthe condition 0. Any that X2 0 not attainablebecause it violatesthe condition
+

8. V =X (oi - 2I1a + a8) 2X1 (ff18 - ag) + 2X2(9a2a -

+ X2(o22 a,3) + Ta8

2o2a +

8T3) +

2XtX2(ff,2 -

I13 -28

o8B)

84

ofFinance The Journal

becauseit 0) is not attainable pointabove the line (1 - X - X2 = 0. 1 X X3 condition that the violates -X2 an isomnean We define curveto be the set of all points(portfolios) to lineis defined an isovariance return. Similarly witha givenexpected ofreturn. witha givenvariance be theset ofall points(portfolios) us theshapesofthe for E and V tells oftheformulae An examination they tellus thattypically9 Specifically curves. and isovariance isomean lines;theisovariare a system ofparallelstraight curves theisomean area system ellipses (see Fig. 2). Forexample, ofconcentric ancecurves X2 = a + form in thefamiliar if 2 ; A3 equation1' can be written (1) bX1;specifically
X2=E-3 A2- A3 AlTA X1. Al2- 3 -

lineassociated withE = Eo is - (1 Thus theslopeoftheisomean

A3)/(2
-

line.This conbut not the slopeof theisomean changetheintercept ofparallel a that the isomean lines form system firms the contention lines. ofanalytic less simple geomeapplication by a somewhat Similarly, a lines the form that isovariance the contention try,we can confirm is of the "center" the of The point system concentric ellipses. family and return minimizes V. We willlabelthispointX. Its expected which as move V. increases away E and we willlabel Variance you variance ifone isovariance C1,lies closerto X curve, fromX. Moreprecisely, thanC2. a smaller variance with thananother, C2,thenC1is associated the let us seek of the apparatus geometric Withthe aid foregoing sets. efficient may falleither ellipses, of isovariance of the system X, the center a case in which 4 illustrates set.Figure theattainable insideoroutside Forno other set.In thiscase: Xis efficient. X falls inside theattainable can no has as as therefore portfolio have either portfolio a V low X; or E withthesameor V (withthesameor greater greater E) smaller return E less than E withexpected smallerV. No point (portfolio) For we have E > E and V < V. is efficient. on return a given all points with E; i.e.,all points Consider expected at line of the isomean The withE. point theisomeanlineassociated line isomean at the is which whichV takeson itsleastvalue thepoint
are as describedabove except when I,u = ,U2= IA3. In the 9. The isomean "Ccurves" have the same expectedreturnand the investorchooses the one lattercase all portfolios variance. with minimum of the isovariancecurvessee footnote in our description implicit As to the assumptions 12.

A3)

its interceptis (E0

A3)/(Ab2

3).

If we changeE we

Selection Portfolio

85

curve.We call thispointX(E). If we let to an isovariance is tangent E vary,X(E) tracesout a curve. here) showus thatthiscurve weomit (which considerations Algebraic linepasses line1.The critical line.We willcallitthecritical is a straight with V for all points minimizes X for point this through E(Xi, X2) = E. The segment fromX, V increases. direction As we go alongI in either linecrosses linefromX to thepointwherethe critical of the critical
X2

\ \

Direction of increasing E*

\\
~~~isovariance

isomean

lines--

~~~~ \
\m

curves

portfolios efficient attainableset c b

\\
ft~~~

_\\

\\ \

\b

XI X

E of increasing *direction depends on It,i,u. #3

FIG. 2

of set.The rest setis partoftheefficient oftheattainable theboundary ab line the the of segment illustrated) case is the set (in efficient the 3, X lies E. In Figure attainable d to b. b is thepointofmaximum from line cuts the admissible area but the critical outsidethe admissible pointwithminimum line beginsat the attainable area. The efficient b untilit intertoward It moves on the line). this case ab variance(in a it intersects line until critical the along moves line, the critical sects reader may The to b. the boundary moves along and finally boundary

E ~~~~~~~~~~~~~~~increasing

-.0

I--,

FIG. 3

Xw|efficient

portfolios

FIG. 4

Portfolio Selection

87

wish to construct and examinethe following othercases: (1) X lies outside theattainable set and thecritical linedoesnotcut theattainable set. In thiscase there is a security which does notenter intoany In thiscase the have thesame isi. efficient portfolio. (2) Two securities line.It mayhappenthatthe linesare parallelto a boundary isomean E is a diversified withl maximum efficient portfolio portfolio. (3) A case wherein is efficient. onlyoneportfolio and also case is,as in the3 security setin the4 security The efficient linesegments. At one endof ofconnected theN security case,a series end is set is thepointofminimum theefficient variance;at theother return'0 a pointofmaximum (see Fig. 4). expected Now thatwe have seen thenatureof theset ofefficient portfolios, ofthesetofefficient to see thenature it is notdifficult (E, V) combinais a plane; V = caseE = ao + aiX, + a2X2 In thethree tions. security + bl2XlX2 + b,,X + b,2X2 is a paraboloid." As bo+ b,Xj+ b2X2 oftheE-planeovertheefficient shown inFigure 5, thesection portfolio of theV-parabline segmen'ts. The section set is a seriesof connected set is a seriesof connected oloid overthe efficient portfolio parabola If we plottedV againstE forefficient we would segments. portfolios ofconnected againgeta series parabolasegments (see Fig. 6). This reforanynumber ofsecurities. sultobtains theuse oftheexpected recommend return-variance Variousreasons to explain bothas a hypothesis well-established investofreturn rule, and as a maximto guideone's own action.The rule mentbehavior we willsee,as an explanation serves better, of,and guideto, "investfrom ment"as distinguished behavior. "speculative"
as weusedtheequationE 10. Just
4

thefour case in 3 dimensional security case,we can use it to represent security space. X4we getE = E(X,, X2,X8), V = V(X,, X2, X8). The attainable Eliminating setis repinthree-space, vertices with resented, bythetetrahedron (0,0,0), (0,0, 1), (0, 1,0), (1,0,0),' X4 = 1, X3 = 1, X2 = 1, XI = 1. representing portfolios with, respectively, Let s12s be the subspace ofall points consisting with we can define X4 = 0. Similarly ofall points , aa to be thesubspace SaX ... consisting with Xi = 0, i $ a,, . .. , aa. For eachsubspace a criticalline la, .... aa. Thislineis thelocusof Sal,.... , aa we can define points P where P minimizes V for all points insal,... Xaa with thesame E as P. If a point is in Sal, . . . , aa andis efficient it must be onla,, . . ., aa. The efficient setmaybe traced out by starting at thepoint of minimum availablevariance, moving continuously along various la, .. . , aa according to definite rules, ending ina point which givesmaximum E. As in thetwodimensional casethepoint with minimum available variance maybe in the oftheavailable interior setorononeofitsboundaries. Typically weproceed along a given lineuntil critical either thislineintersects oneofa larger or meets subspace a boundary thecritical lineof a lower (and simultaneously dimensional subspace). In either of these casestheefficient lineturns andcontinues alongthenewline.The efficient lineterminates when a point with maximum E is reached. 11. See footnote 8.

i= 1

= 1 to reduce thedimensionality in thethree

/
a
X2

b I _X set of efficient portfolios

FIG. S

V combinations E,

efficient

E
FIG.

Portfolio Selection

89

thatit Earlier we rejected theexpected returns ruleon thegrounds of diversification. The expected returnneverimplied the superiority on theother diversification fora variance ofreturn rule, hand,implies not of This mean the rule imE-V never widerange pi, o-j. does that It is conceivable that pliesthesuperiority ofan undiversified portfolio. yieldand lowervariance one security might have an extremely higher so muchso thatone particular thanall other undiversified securities; E and minimum V. But fora large, portfolio wouldgive maximum presumably representative range ofAi, rijtheE- V ruleleadstoefficient all ofwhich almost are diversified. portfolios Not onlydoes the E-V hypothesis it implies implydiversification, for reason." kind"ofdiversification the"right The adequacy the"right ofdiversification is not thought to dependsolelyon the by investors with sixty different railnumber ofdifferent securities held.A portfolio for wouldnotbe as welldiversified as thesame waysecurities, example, somepublicutility, mining, various size portfolio withsomerailroad, The is is that it more generally sort of manufacturing, etc. reason poorly at the same time likely for firms within thesameindustry to do for in than firms dissimilar industries. in trying to makevariance smallit is notenouglh to invest Similarly in manysecurities. in securities with It is necessary to avoidinvesting acrossindushighcovariances amongthemselves. We shoulddiversify in different triesbecausefirms industries with especially industries, have covariances than firms different economic characteristics, lower an industry. within in financial The concepts"yield" and "risk" appear frequently if writings. Usually the term"yield" were replacedby "expected ofreturn," and "risk"by "variance little yield"or "expected return," ofapparent wouldresult. change meaning is a well-known measure ofdispersion abouttheexpected. Variance If instead ofvariance was concerned withstandard error, theinvestor a' = VV, or withthe coefficient of dispersion, oyE, his choicewould stilllie in theset ofefficient portfolios. twoportfolios d'iversifies between (i.e.,ifheputs Supposean investor in oneportfolio, in theother. someofhismoney therestofhismoney oftheshares ofdiversifying An example is thebuying among portfolios If thetwooriginal of twodifferent investment portfolios companies). oftheresulting (comhave equalvariance thentypicallyl2 thevariance ofeither willbe less thanthevariance original portpound)portfolio
willnotbe variance be increased. The onlycase in which 12. In no casewillvariance To drawtheisoareperfectly correlated. is ifthereturn from bothportfolios decreased toassume thatno twodistinct itis both variance curves as ellipses necessary andsufficient portfolios haveperfectly correlated returns.

go

The Journal of Finance

folio. Thisis illustrated by Figure 7. To interpret Figure 7 wenotethat a portfolio (P) which is builtoutoftwoportfolios P' = (X, X2) and P (X1, X2) is of the formP = XP + (1 - X)P = (XX + (X)X7, XXI+ (1 - )X2). P is on the straight line connecting P' andP". The E- V principle is more plausible as a rulefor investment behavior as distinguished from speculative behavior. The third moment"3 M3 of

X2

;~~~~~~~~~sovarionee

c
FIG. 7

b
XI

ofreturns theprobability distribution from theportfolio may be conFor example iftheinvestor nected witha propensity to gamble. maximizesutility on E and V(U = U(E, V), d U/1E > (U) which depends 0, d Ul/E < 0) he willneveracceptan actuarially fair'4bet. But if
13. If R is a random variable number ofvaluesrl,. . . , r. with thattakeson a finite n andexpected valueE, then probabilities Pi,..., pn respectively, Ms = pi(ri-E)3
t=1

14. Oneinwhich theamount gained bywinning thebettimes theprobability ofwinning

Selection Portfolio

91

are somefairbets $ 0 thenthere U = U(E, V, M3) and if 69U/0M3 wouldbe accepted. which whichconinstitutions Perhaps-fora greatvarietyof investing to be sidery'ieldto be a good thing;risk,a bad thing;gambling, and a as a working hypothesis is reasonable avoided-E, V efficiency maxim. working use it We might themselves. suggest Two uses oftheE-V principle of analysesor we mightuse it in the actual selection in theoretical portfolios. forexample, about the analyseswe mightinquire, In theoretical held about a firm, ofa changein the beliefs generally variouseffects as to expected versus variance return inpreference change or a general In ouranalysesthe ofa security. or a changein thesupply ofreturn, orthey securities aggrerepresent individual might represent Xi might and realestate." gatessuchas, say,bonds,stocks ofsecurities we musthaveproTo use theE-V rulein theselection I believe, These and reasonable procedures, forfinding cedures aiq. ,ui of practical and the judgment statistical techniques shouldcombine should be used to computations is thatthestatistical men.My feeling shouldthenbe used and -ij.Judgment set of A,i arriveat a tentative someoftheseAi and aoj on thebasis offacor decreasing in increasing computations. torsor nuancesnot takenintoaccountby the formal V combinaof the set efficient and set of E, revised this Using aii, Ai he couldselectthecombination theinvestor tionscouldbe computed, which gave riseto thisE, V combination and theportfolio preferred, couldbe found. take which methods, forsomeperiodofthepast. I believethatbetter I believethatwhatis can be found. intoaccountmoreinformation, of security analyreformulation a "probabilistic" neededis essentially It is story." forthisis "another thissubject here, sis. I willnotpursue of the first chapter. the first I have read of which page only a story of thesecondstagein theprocess In thispaperwe have considered about the relevant beliefs This starts with a portfolio. stage selecting of a portfolio. We and endswiththe selection involved the securities of the relevant beformation the first the stage: have not considered on thebasis ofobservation. liefs
Wecannot relations among aggregates. andinterpreting beusedinusing 15. Caremust ofaggregation. andpitfalls with theproblems dealhere

One suggestionas to tentativeji, aij is to use the observed Ai, ai