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An Overlooked Step in the History of Portfolio Theory

Author

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  • Robert W. Dimand

    (Brock University [Canada])

  • Christian Walter

    (LAP - Laboratoire d’anthropologie politique – Approches interdisciplinaires et critiques des mondes contemporains, UMR 8177 - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique)

Abstract

The Nobel Prize-winning work of Harry Markowitz (1952, 1959) at the Cowles Commission and Cowles Foundation established optimal portfolio diversification (minimizing risk for a given expected return) as central to financial theory. Much less attention has been given to the first Cowles Commission study to show that diversification reduced portfolio risk: Dickson Leaven's article "Diversification of Investments" (published in Trusts and Estates, 1945). Leavens, a statistician on the Cowles Commission staff and author of a Cowles monograph on silver money, came to this insight as the result of computing returns on twenty randomly-selected portfolios for Alfred Cowles to use in Cowles's 1944 Econometrica article "Stock Market Forecasting," which argued that, with one apparent exception, stock market forecasters had failed to out-predict random portfolios. We present Leavens' little-known contribution and explore his role in the development of financial economics at the Cowles Commission.

Suggested Citation

  • Robert W. Dimand & Christian Walter, 2024. "An Overlooked Step in the History of Portfolio Theory," Post-Print hal-05148912, HAL.
    • Handle: RePEc:hal:journl:hal-05148912
    DOI: 10.19272/202406101008
    Note: View the original document on HAL open archive server: https://hal.science/hal-05148912v1
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