MeanVarianceModell

The Mean-Variance Model, often referred to as Markowitz's Mean-Variance Model, is a fundamental concept in modern portfolio theory. Developed by Harry Markowitz, it provides a framework for constructing investment portfolios that aim to maximize expected return for a given level of risk, or conversely, minimize risk for a given level of expected return.

The model's core idea is that investors are rational and risk-averse. They therefore seek to optimize their portfolio based on two key statistical measures: the expected return of the portfolio and the variance (or standard deviation) of its returns, which serves as a proxy for risk. The model assumes that investors can quantify these expectations for individual assets and the correlations between them.

By considering a set of potential assets, the Mean-Variance Model calculates all possible portfolio combinations and their corresponding expected returns and variances. The set of portfolios that offer the highest expected return for each level of risk is known as the efficient frontier. Any portfolio lying on the efficient frontier is considered optimal in the sense that no other portfolio offers a higher return for the same risk or a lower risk for the same return. Investors can then choose a portfolio from this frontier that aligns with their individual risk tolerance.

While groundbreaking, the Mean-Variance Model relies on several assumptions that may not always hold true in real-world markets, such as the normality of asset returns and the ability to accurately forecast future returns and volatilities. Despite these limitations, it remains a cornerstone of financial theory and practice, influencing asset allocation strategies and the development of more sophisticated portfolio optimization techniques.