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This chapter presented a short introduction to some of the foundations of Modern Portfolio Theory (MPT) in the tradition of Harry Markowitz, James Tobin and William Sharpe. With respect to computability, these models have to rely on rather strict assumptions that are not always able to depict real market situations. Subsequent models try to include these missing aspects, yet suffer from other shortcomings as they usually have to make strong simplifications in other aspects in order to remain solvable.
In the main part of this contribution, too, the original MPT models will be enhanced to allow a more realistic study of portfolio management problems. Unlike other approaches in the literature, however, the trade-off between model complexity and its exact solvability will not be answered by “exchanging” one simplifying constraints for another, but by applying new solution methods and optimization techniques. The basic concepts of these methods will be presented in the following chapter.
KeywordsRisk Measure Risk Premium Portfolio Optimization Portfolio Selection Expected Return
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