Against the Gods: Through all the years of stocks, people never thought
of defining risk with numbers. It was never about a definition, but about the
feeling in your gut when you see that your risk was rising. In the world of
Stocks there are two types of people; the ones who stand by risk and the ones
who lean on security.
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[Category]:
Book Reports
[Paper Title]:
Against the Gods
[Text]:
Through all the years of stocks, people never thought of defining risk with
numbers. It was never about a definition, but about the feeling in your gut when
you see that your risk was rising. In the world of Stocks there are two types of
people; the ones who stand by risk and the ones who lean on security. The
aggressive and the faint-hearted. The young man, who separated these, weak from
strong, wrote an article in June 1952, to the Journal of Finance. This man,
Harry Markowitz, an unknown 25-year-old graduate student at the University of
Chicago, wrote a fourteen-page article titled “Portfolio Selection.”
Markowitz was dealing with a subject ‘considered too dicey and speculative for
sober academic analysis.’ He was writing for the big boys.
Immediately Markowitz decisively pinpoints his objectives, stating that ‘an
investor should not select securities based on their individual properties, but
based on how they fit into the whole of the portfolio.’ In other words, the
risk of a prospective security is irrelevant to the investment decision, it is
only the degree to which the addition of this security raises the risk of the
portfolio as a whole that should be considered. This is an important
perspective, since it is quite possible for an extremely unpredictable security
to add very little risk to a portfolio when it is "uncorrelated" with
the securities already in the portfolio. In other words, since the individual
securities do not move together, some of the movement of each is "washed
out" by the movement of the others. These happenings are very unreliable to
predict and nowhere near able to control. Stocks, bonds, saving accounts, and
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