The merits of portfolio diversification were probably first acknowledged by the simple rule proposed in the Babylonian Talmud: one-third in real estate, one-third in merchandise (working capital) and the remaining third in liquid assets.
However, a rigorous mathematical argument in favour of diversification was only articulated by Harry Markowitz’s renowned paper, “Portfolio Selection”, which appeared in March 1952 in the Journal of Finance. As we approach the 70th anniversary of its publication, it seems fitting to assess its influence.
Markowitz is universally recognised as the father of modern finance. In fact, before him, portfolio management did not exist as a discipline. Investment decisions were driven mostly by ad hoc rules and gut feeling rather than sound quantitative analyses. The fact that Markowitz is still alive is a testimony of how young this discipline is.