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Open Access Publications from the University of California

How MPT Works in Reality?

  • Author(s): Bai, Han
  • Advisor(s): Schoenberg, Rick P
  • et al.

The major goal of this thesis is to discuss and test some of the models and fundamental elements of the Modern Portfolio Theory in order to learn about whether the optimal portfolios constructed on the theory formulate the best asset allocation in reality. In an effort to solve this question, three different models are tested by three fundamental elements of the theory respectively. The outcomes for each model and element are discussed and evaluated.

The empirical result shows that the models are inconsistent, which leads to the conclusion that optimal portfolios based on Modern Portfolio Theory are not the best asset allocation strategies in the real investment world. The main reason can be concluded that the models based on the theory make oversimplified approximations of the reality.

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