Markowitz Portfolio Theory in Practice: How to Build a Mathematically Optimal Portfolio

Harry Markowitz proved: The best investment is not the best asset - it is the best combination. Learn the math behind the optimal portfolio.

What you'll take away from this article

How to understand the efficient frontier according to markowitz and use it for your capital strategy
How to understand why correlations are everything and use it for your capital strategy
How to understand in practice: the optimal portfolio and use it for your capital strategy
How to understand related articles and use it for your capital strategy

The Efficient Frontier according to Markowitz

Harry Markowitz received the Nobel Prize in 1990 for his insight: It's not about the best single investment. It's about which combinations of investments together offer the best risk-reward ratio.

The “Efficient Frontier” is the line of all portfolios that have the highest possible risk return. To the left are worse combinations. Right is impossible (higher risk, same return).

Efficient Frontier (μ-σ concept)

All optimal portfolios lie on this curve

Why correlations are everything

Markowitz's secret is not complicated: When two assets are not perfectly correlated, you benefit from diversification.

1 + 1 = 1.5 The magic of negative correlation

If you combine two assets with -0.5 correlation, the portfolio risk is less than the sum of the individual risks. This is the only “free meal” in finance.

Correlation matrix: asset classes among each other

Dark blue = high positive correlation | Light yellow = low/negative

In practice: The optimal portfolio

Huber's efficiency line analysis (Figures 83 and 84) identifies the mathematically optimal portfolio for different risk profiles.

Conservative (σ=10%):40% stocks, 40% bonds, 15% gold, 5% commodities

Balanced (σ=14%):50% stocks, 25% bonds, 15% gold, 10% commodities

Aggressive (σ=18%):65% stocks, 15% bonds, 10% gold, 10% commodities

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Akademische Quelle: Master Thesis

Entwicklung einer optimalen Asset Allocation in Zeiten expansiver Geld- und Fiskalpolitik
Daniel Huber, M.A. — Hochschule Mainz, 2020 | Betreut von Prof. Dr. Arno Peppmeier
13.174 Wörter · 92 Abbildungen · 39 Tabellen · Markowitz-Effizienzlinienanalyse

Vollständige Thesis herunterladen (PDF, 6 MB) →

Daniel Huber

Gründer & CEO von CANVENA | 215 Mio. USD Track Record

Your advantage after this article

What you now know — and how to use it

You know the core concepts and can apply them directly to your situation
You know which mistakes to avoid — saving you time and capital
You understand how this building block fits into your overall strategy

Your next step: Have your situation professionally assessed — free and non-binding in an initial consultation with Daniel Huber.

Sources & Further Reading

This article is based on a review of leading expert literature and curated primary sources from the CANVENA source matrix — more than 60 core books and 120 online resources across all relevant fields from capital intelligence, family office, strategy and valuation.