Early this morning when I was cracking my head to find the best solution to my Modern Portfolio Theory paper structure, I came to a wonderful discovery that I thought I would want to write it here after the exam; but I could care less since moment like this doesn't come often. And thank you to the Sumatra coffee that had kept me awake to see all these new development.
50 years ago, Harry Markowitz paper on "Portfolio Selection" was published in the The Journal of Finance in 1952. The ideas introduced in this article have come to form the foundations of what is now popularly referred to as Modern Portfolio Theory (MPT). Throughout the years, his work has been the foundation for the financial community, that in 1990 Markowitz was awarded the Nobel Prize.
"Modern Portfolio Theory quantifies the benefits of diversification. Through a mathematical technique called mean-variance optimization, Markowitz showed exactly how an investor could reduce the volatility (risk as measured by standard deviation) of portfolio returns by choosing assets that do not move exactly together. When he graphed volatility (risk) against expected return, Markowitz developed a way to view the efficiency of a portfolio. A portfolio is said to be optimally efficient if there is no portfolio having the same volatility (risk) with a greater expected return and there is no portfolio having the same return with a lesser volatility. - Montecito Capital Management on MPT"
And I just realized that although many writers would use the eggs analogy of explaining this theory, I could somewhat now use this theory as a reasoning to explain why being A Jack of All Trade and the life-lng learning is an optimum strategy for every individual to survive in the knowledge economy.
Let's say you have an undergraduate degree in the Electrical Engineering and you somewhat after five years into your career stuck in a position where you could just pray for the manager to die or leave the firm to get the position, or get a new job elsewhere, or start a new business. Or let's say you were in the semiconductor and the economic cycle hits the industry rock bottom that demand stumbles and production is reduced significantly, and the management just announced a retrenchment scheme. Bet you would be scared as hell when your career is at stake.
So let's say that degree paper is your only portfolio, and if you don't venture into new knowledge or new skill, your portfolio remain just that one share. Hence, exposing yourself to risk of cyclical unemployment. Therefore, a rational knowledge worker would pursue on something new, either by self-learning, getting certified professionally, attend seminar, or take up post graduate courses. With the new skills becoming new shares, you now have a basket of portfolio of share of knowledge and skills, each with its expected return, since knowledge today is source of power and profit.
In the event of downturn in the economic, each of your share is exposed to risk of being either unwanted or insignificantly in demand at that period of time, thus its volatility disperse widely, hence, the risk of any of the share in the portfolio to decrease in its market value.
You motivation and passion to explore or learn something new can be described using the marginal utility curve that could also define your risk preference, whether you are willing to take new challenge (risk loving), or stay put at where you are (risk averse), or being indifference at any of these two choice as you are probably already making your big bucks (risk neutral). Your curve when plotted with the composition of your portfolio, will intersect at a point, of which yields your optimum portfolio, whereby you can now determine what new knowledge or skills gives you the higher return, given the level of risk that you can tolerate.
And I will after my exam plot my utility curve and play the like of David Friedman reasonings in the Economics of Everday Live to determine my optimum portfolio and thus charting long term investment, both as an investor and the fund manager!