History

Investors acquire stocks so they can take part in the appreciation of that stock. In doing so they take a risk. The risk is that the return will be lower than they expected or that the company can go into bankruptcy, eroding any gain and even the entire investment.

Significance

The theory was put to the test in 2008. An all-government bond portfolio would have gone up. In contrast if you owned nothing but one of the stocks that sought a bailout you would have lost the majority of your portfolio. Theoretically if you follow the theory you would have had a bit of both helping to offset some of your losses with gains. This means that diversification versus concentration works.

Considerations

One of the biggest gripes in the industry has been that the theory cannot be made into a mathematical model. There isn't a way to develop a model that adheres to the theory and therefore gives you the best return possible, by compiling the ideal portfolio. The theory still allows for human error, since investments are still being made by individuals or investment professionals.

References

Resources

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