ABSTRACT
Modern Portfolio Theory (MPT) revolutionized investing and the world’s economy. But it is deeply flawed. The evolution of capital markets, the explosion in computing power, and the increasing recognition of systematic risk as driving more than three-quarters of investment risk and return has exposed MPT’s weaknesses. The authors examine many of the associated theories surrounding MPT − capital asset pricing model, economic rationality, random walks down Wall Street, and the efficient market hypothesis – and find them based on flawed assumptions. They also note the “performativity” of the MPT tradition; that is how it tends to create its own validity, simply because people believe and follow it and becomes a victim of its own success. They note MPT’s real-world impacts, such as index effects, super portfolios, and changes to companies’ corporate governance and spending on research and development.
