An Overlooked Step in the History of Portfolio Theory

Robert W. Dimand () and Christian Walter ()
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Robert W. Dimand: Brock University [Canada]
Christian Walter: LAP - Laboratoire d’anthropologie politique – Approches interdisciplinaires et critiques des mondes contemporains, UMR 8177 - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique

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Abstract: The Nobel Prize-winning work of Harry Markowitz (1952, 1959) at the Cowles Commission and Cowles Foundation established optimal portfolio diversification (minimizing risk for a given expected return) as central to financial theory. Much less attention has been given to the first Cowles Commission study to show that diversification reduced portfolio risk: Dickson Leaven's article "Diversification of Investments" (published in Trusts and Estates, 1945). Leavens, a statistician on the Cowles Commission staff and author of a Cowles monograph on silver money, came to this insight as the result of computing returns on twenty randomly-selected portfolios for Alfred Cowles to use in Cowles's 1944 Econometrica article "Stock Market Forecasting," which argued that, with one apparent exception, stock market forecasters had failed to out-predict random portfolios. We present Leavens' little-known contribution and explore his role in the development of financial economics at the Cowles Commission.

Keywords: Portfolio choice; diversification; Alfred Cowles; Cowles Commission; Dickson Leavens; Harry Markowitz (search for similar items in EconPapers)
Date: 2024
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Published in History of Economic Ideas, 2024, 32 (1), pp.179-195. ⟨10.19272/202406101008⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-05148912

DOI: 10.19272/202406101008

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