Stephen Craffen of Stonegate Wealth Management in Oakland, NJ joins Roger and Ben to discuss Modern Portfolio Theory, from its humble origins as a scrappy idea cooked up in a back room at the University of Chicago through its ascendancy and eventual dominance on every CFP and CFA multiple choice exam. And you thought you were done with this stuff!

We touch on a number of critical concepts, including:

  • The creation and important takeaways of Modern Portfolio Theory (MPT)
  • Thenecessary assumptions that make MPT "work" and the limitations thereof
  • Possible updates to Modern Portfolio Theory, including the Black-Litterman approach of portfolio allocation and making use of concepts like Conditional Value at Risk
  • Fat tails, extreme events (like 2008) and the challenge of serial correlation
  • Roger riffing on the Gaussian distribution

Links to Neat Things We Talk About

  • Stephen mentions the seminal work of Roger Ibbotsen and asset allocation. His regularly updated book on the returns of asset classes over time is a widely known, but did you know that the name of his current firm is Zebra Capital Management? How did we not know this! We're ZebraSmash!

  • Roger Lowenstein's When Genius Failed: The Rise and Fall of Long-Term Capital Management is another classic. It's always fun to read about how the economic system almost came crashing down.