Remembering Harry Markowitz: A Risk Management Pioneer and Beloved Mentor
The risk community looks back on the finance legend and Nobel Prize winner, whose creation of Modern Portfolio Theory (MPT) transformed wealth management forever.
Monday, July 31, 2023
By Tod Ginnis
Harry Markowitz was far from an ordinary risk practitioner. As the mind behind Modern Portfolio Theory (MPT), which he created in 1952, Markowitz engineered an enduring method for building an investment portfolio designed to maximize returns within acceptable risk parameters.
The key to the approach is in considering the quantitative correlation between the returns of assets — not just their individual return volatilities. This allows you to create a portfolio consisting of assets with low return correlations with each other such that the overall portfolio risk (as measured by volatility) is less than the sum of the individual volatilities. Markowitz’ theory revolutionized wealth management and risk management, eventually earning him the Nobel Prize in Economic Sciences.
According to Bill May, GARP’s global head of certifications and educational programs, Markowitz’ work was foundational to the development of a quantitative approach to finance and risk management. “The whole field of risk management owes a debt of gratitude to him,” says May. “A lot has taken place since his original 1952 paper, but his approach to portfolio construction has remained a key part of portfolio analysis and risk management.”
May emphasizes that the Financial Risk Manager (FRM®) Certification curriculum continues to cover MPT, in addition to Markowitz’ Efficient Frontier, as “these concepts have played a crucial role in the evolution of the quantitative approach to investing and risk.”
For generations, young investors were told “don't put all your eggs in one basket” to encourage diversification. “That observation has existed for a very long time, but taking a quantitative approach to it was new,” May opines. “Pioneers like Markowitz moved the practice beyond vague rules of thumb and gave professionals the ability to quantify risk more strictly.”
A “Tough But Fair” Reputation
Beyond his professional accomplishments, Markowitz had an outsized personal impact on many lives.
Richard Ottoo, GARP’s vice president of certifications and educational programs group for the FRM program, was a Ph.D student under Markowitz at City University of New York, Baruch College. Ottoo describes Markowitz as a great teacher who was “tough but fair.” While he wasn’t an easy grader, Ottoo says the professor would always explain a poor mark on a particular question. Ottoo took two courses in probability taught by Markowitz, which helped inspire Ottoo’s award-winning doctoral thesis. “It was the first time a Baruch student had won the FMA Doctoral Dissertation Award. I was really proud of that,” says Ottoo.
Ottoo describes Markowitz as highly encouraging, recalling the professor’s story of his own near failure after presenting his dissertation at the University of Chicago. Initially, the dissertation committee didn’t want to award him the degree because they thought his presentation was about statistics and not finance. “That story gave me the courage to have faith even when people say ‘no,’” says Ottoo. “If you believe that you're going in the right direction and doing quality work, persistence can pay off.”
Ottoo met the finance legend soon after arriving in New York City from Uganda in 1990 when students threw Markowitz a pizza party to celebrate the announcement of his Nobel Prize. “I was struck by how humble he was, eating sandwiches and taking the subway like the rest of us,” Ottoo reflects. And far from resting on his laurels in a teaching position, Markowitz was also the director of research at Daiwa Securities Trust Company, a major international bank, where he pioneered the use of large data sets to manage portfolios. That industry experience, Otto recalls, made Markowitz even more valuable as a teacher.
“Markowitz was a true visionary in evangelizing that investments are about return and risk, and most importantly, you need a real way to measure risk. If you can’t measure risk, you can’t make informed investment decisions,” says Ottoo. “We can celebrate him because he gave so much to the world and to so many individuals. In risk management we are better off because we use his work to make better decisions.”
Tod Ginnis is a content specialist at GARP. He is the author of a GARP blog that is aimed at early-career risk managers and professionals aspiring to earn theirFinancial Risk Manager (FRM)certification.