In the 1952 issue of the Journal of Finance (Vol. 7, Issue 1, p. 77-91) a paper called "Portfolio Selection" by Harry Markowitz appeared. A young Dr. Markowitz proposed what many consider as the most monumental contribution to modern finance and investing. His simplistic, but supported arguments for market efficiency and return maximization verses standard deviation/risk provided a giant leap forward in the academic concepts of investing. What he proposed would give us the concepts of the "Efficient Frontier," and provide the basis for "Modern Portfolio Theory."

Though his paper received chuckles by many, it earned him the Nobel Prize in Economics 38 years later in 1990. Through statistical analysis he measured risk for a portfolio of “N” risky assets as a function of each asset’s return variance, each asset’s weight in the portfolio, and the covariance of each asset’s returns with all other assets. To the left is a stylilized version of the Markowitz Efficient Frontier. The black line around the edge of the curve from the 9 o'clock position to the 12 o'clock position represent ideal portfolios. The blue area represents less than ideal portfolios. Any portfolio constructed that falls in the blue region should be reconstructed because either more return can be gained given the same risk or less risk can be taken given the same return.