Mean-Variance Analysis
Updated 2026-08-08
INTRODUCTION
English translation pending.
CORE DEFINITION
Mean-variance analysis, proposed by Harry Markowitz, frames portfolio choice as maximizing expected return measured by the mean at a given level of risk measured by the variance. By combining assets whose returns are less than perfectly correlated, an investor can reduce variance without reducing expected return, eliminating unsystematic risk. The efficient frontier is the set of portfolios that maximize return at each risk level. The key condition is reliable estimates of means and covariances.
SCAFFOLDING EFFECT
Reduce cognitive load
- Risk pricing: state the risk you are willing to bear before choosing assets. - Diversification logic: combine weakly correlated assets to cut variance without giving up return. - Frontier discipline: keep the portfolio on the efficient frontier and rebalance it.
Anchor fast decisions
Markowitz measured expected return by the mean and risk by the variance or standard deviation. Combining assets with correlations below one reduces portfolio variance without lowering expected return, which diversifies away unsystematic risk; the efficient frontier collects the best such combinations at every risk level.
MINIMUM ACTION
In progress 0/1Practice this model in one real situation:
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Source support: Explicit
- en.wikipedia.orghttps://en.wikipedia.org/wiki/Modern_portfolio_theoryverified
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