Markowitz’s Efficient Frontier in Python [Part 1/2]
Harry Markowitz’s contribution to the world of finance and economics cannot be emphasized enough. He is widely regarded as the pioneer of Modern Portfolio Theory (MPT) with his groundbreaking paper “Portfolio Selection” in 1952. He eventually won a Nobel Memorial Prize in 1990 in Economic Sciences for his contribution to the field.
MPT is taught around the world in practically every business/finance class. This post (part of a 2 part series) looks at the underpinnings of the theory and the construction of an efficient frontier with Python using real-world stock data.
So what is MPT, why should you even bother understanding it and how does it even work with Python?
Like most theories, MPT was developed with some assumptions of the real world. The attempt to explain MTP commences with a presentation of its assumptions:
ASSUMPTIONS OF MPT
- Investors are rational and avoid risks whenever possible
- Investors aim for the maximum returns for their investment
- All investors share the aim maximizing their expected returns
- Commissions and taxes on the market are left out of consideration
- All investors have access to the same sources and level of all…
