Modern Portfolio Theory and Risk Management: Assumptions and Unintended Consequences

SMC Author

James P. Hawley

SMC Affiliated Work

1

Status

Faculty

School

School of Economics and Business Administration

Department

Organizations and Responsible Business

Document Type

Article

Publication Date

2013

Publication / Conference / Sponsorship

Journal of Sustainable Finance and Investment

Description/Abstract

This article presents an overview of the assumptions and unintended consequences of the widespread adoption of modern portfolio theory (MPT) in the context of the growth of large institutional investors. We examine the many so-called risk management practices and financial products that have been built on MPT since its inception in the 1950s. We argue that the very success due to its initial insights had the unintended consequence, given its widespread adoption, of contributing to the undermining the foundation of the financial system in a variety of ways. This study has relevance for both the ongoing analyses of the recent financial crisis, as well as for various existing and proposed financial reforms.

Keywords

benchmarking, contagion, efficient market hypothesis, financial crisis, financial reforms, investor herding, modern portfolio theory, risk management, systemic risk

Scholarly

yes

Peer Reviewed

1

DOI

10.1080/20430795.2012.738600

Volume

3

Issue

1

First Page

17

Last Page

37

Disciplines

Business | Economics

Original Citation

Beyhaghi, M. & Hawley, J. P.(2011). Modern Portfolio Theory and Risk Management: Assumptions and Unintended Consequences. Journal of Sustainable Finance and Investment, 3 (1), 17-37

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