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Upstanding Markowitz

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Modern Portfolio Theory was not yet adolescent in 1960, when William F. Sharpe, a 26-year-old researcher at the RAND Corporation, a think tank in Los Angeles, introduced himself to a fellow economist named Harry Markowitz. Neither of them knew it then, but that casual knock on Markowitz’s office door would forever change how investors valued securities.

Sharpe, then a Ph.D. candidate at the University of California, Los Angeles, needed a doctoral dissertation topic. He had read “Portfolio Selection,” Markowitz’s seminal work on risk and return—first published in 1952 and updated in 1959—that presented a so-called efficient frontier of optimal investment. While advocating a diversified portfolio to reduce risk, Markowitz stopped short of developing a practical means to assess how various holdings operate together, or correlate, though the question had occurred to him.

Sharpe accepted Markowitz’s suggestion that he investigate Portfolio Theory as a thesis project. By connecting a portfolio to a single risk factor, he greatly simplified Markowitz’s work. Sharpe has committed himself ever since to making finance more accessible to both professionals and individuals.

In 1990, Harry Markowitz, William Sharpe, and Merton Miller jointly received the Nobel Prize in Economic Sciences for their profound contributions to the field of financial economics.

Source: https://www.nobelprize.org/prizes/economic-sciences/1990/press-release/

Harry Markowitz’s concepts of “mean-variance analysis” simplified the complex task of constructing diversified portfolios and introduction of the “Efficient Frontier” is a seminal contribution to the field of modern portfolio theory. Developed in the 1950s, this groundbreaking theory fundamentally changed the way we approach investment to optimize returns while minimizing risk.

The Efficient Frontier is a graphical representation of the relationship between risk and return for a given set of company shares, called a portfolio. In simple terms, it is a way of visualizing how to build an investment portfolio that provides the highest expected return for a given level of risk, or conversely, the lowest risk for a given expected return. The central idea is to achieve the best possible risk-return trade-off, a concept that is at the core of portfolio management. The capital allocation line (CAL) represents the trade-off between the risk and expected return of a portfolio.

The x-axis on the CAL typically represents the standard deviation (volatility) of the portfolio, which is a measure of its risk. On the y-axis, you would find the expected return of the portfolio. The CAL visually illustrates how portfolios with different combinations of risky and risk-free assets can achieve various risk-return profiles. In a typical graph, the Capital Allocation Line (CAL) usually takes an upward trajectory. This is because the risk-free return, which is considered the lowest return available in any financial market, occupies the lowest point on the y-axis where the x-axis intersects at zero, representing the risk-free rate (as illustrated in Figure 1).

Figure 1: Efficient Frontier and CAL

Source: https://thefinancialintern.wordpress.com/2012/07/29/modern-portfolio-theory-creating-the-capital-allocation-line/

The efficient drawn for a portfolio in stock market in New Zealand and Australia in 2018 are provided in Figure 2.

Figure 2: efficient Frontier and the CAL for five shares in NZX and ASX

During my MBA class, students must construct efficient frontiers using a portfolio of shares from the Colombo Stock Exchange (CSE) in one of the assignments. The efficient frontier and the CAL drawn by the students resulted in a graph.

Figure 3:

CAL in Colombo Stock Market (Upstanding the CAL in Sri Lanka)

They asked, “Sir, can the Capital Allocation Line (CAL) intersect with the efficient frontier?” I playfully replied, “Well, in Sri Lanka, anything is possible.”

It’s a rare and unlikely situation for assets considered risk-free, such as three-month government treasury bills, to offer higher returns than riskier assets.

Why doesn’t everyone use the Markowitz model to solve their investment problems? The answer again lies in the statistics. The historical mean return may be a poor estimate of the future mean return. As you increase the number of securities, you increase the number of correlations you must estimate — and you must estimate them correctly to obtain the right answer.

Criticisms of the Efficient Frontier

The efficient frontier and modern portfolio theory have many assumptions that may not properly represent reality. For example, one of the assumptions is that asset returns follow a normal distribution.4

In reality, securities may experience returns (also known as tail risk) that are more than three standard deviations away from the mean. Consequently, asset returns are said to follow a leptokurtic distribution or heavy-tailed distribution.

Additionally, Markowitz posits several assumptions in his theory, such as that investors are rational and avoid risk when possible, that there are not enough investors to influence market prices, and that investors have unlimited access to borrowing and lending money at the risk-free interest rate.4

However, reality proves that the market includes irrational and risk-seeking investors, there are large market participants who could influence market prices, and there are investors who do not have unlimited access to borrowing and lending money.

For the benefit of the investors reading this column, I’m going to share a few portfolios constructed from the shares of CSE, each containing five shares in this column in coming weeks. I will also include their financial data and historical returns spanning a decade. Furthermore, I hope to present the efficient frontiers for 10 different combinations (proportions) for each portfolio and pinpointed the best one using the Sharpe Ratio.

(The writer, a senior Chartered Accountant and professional banker, is Professor at SLIIT University, Malabe. He is also the author of the “Doing Social Research and Publishing Results”, a Springer publication (Singapore), and “Samaja Gaveshakaya (in Sinhala). The views and opinions expressed in this article are solely those of the author and do not necessarily reflect the official policy or position of the institution he works for.)



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Breathtaking new paintings found at ancient city of Pompeii

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The frescoes depict Greek mythology: Paris kidnaps Helen which triggers the Trojan War (BBC)

Stunning artworks have been uncovered in a new excavation at Pompeii, the ancient Roman city buried in an eruption from Mount Vesuvius in AD79.

Archaeologists say the frescoes are among the finest to be found in the ruins of the ancient site.

Mythical Greek figures such as Helen of Troy are depicted on the high black walls of a large banqueting hall.

The room’s near-complete mosaic floor incorporates more than a million individual white tiles.

BBC/Tony Jolliffe The Black Room

The black room has only emerged in the last few weeks. Its white mosaic floor is almost complete (BBC)

A third of the lost city has still to be cleared of volcanic debris. The current dig, the biggest in a generation, is underlining Pompeii’s position as the world’s premier window on the people and culture of the Roman empire.

Park director Dr Gabriel Zuchtriegel presented the “black room” exclusively to the BBC on Thursday.

It was likely the walls’ stark colour was chosen to hide the smoke deposits from lamps used during entertaining after sunset. “In the shimmering light, the paintings would have almost come to life,” he said.

Two set-piece frescoes dominate. In one, the god Apollo is seen trying to seduce the priestess Cassandra. Her rejection of him, according to legend, resulted in her prophecies being ignored.The tragic consequence is told in the second painting, in which Prince Paris meets the beautiful Helen – a union Cassandra knows will doom them all in the resulting Trojan War.

BBC/Tony Jolliffe One of the "black room" frescos discovered in Pompeii, showing Apollo trying to seduce the priestess Cassandra

The god Apollo is depicted on one of the frescos trying to seduce the Trojan priestess Cassandra (BBC)

The black room is the latest treasure to emerge from the excavation, which started 12 months ago – an investigation that will feature in a documentary series from the BBC and Lion TV to be broadcast later in April.

A wide residential and commercial block, known as “Region 9”, is being cleared of several metres of overlying pumice and ash thrown out by Vesuvius almost 2,000 years ago.

Staff are having to move quickly to protect new finds, removing what they can to a storeroom.

For the frescoes that must stay in position, a plaster glue is injected to their rear to prevent them coming away from the walls. Masonry is being shored up with scaffolding and temporary roofing is going over the top.

BBC/Tony Jolliffe Fresco protection

A plaster glue must be injected behind a fresco or it is likely to come away from the wall (BBC)

Chief restorer Dr Roberta Prisco spent Tuesday this week trying to stop an arch from collapsing. “The responsibility is enormous; look at me,” she said, as if to suggest the stress was taking a visible toll on her. “We have a passion and a deep love for what we’re doing, because what we’re uncovering and protecting is for the joy also of the generations that come after us.”

BBC Map showing excavations in Pompeii

Region 9 has thrown up a detective story for archaeologists.

Excavations in the late 19th Century uncovered a laundry in one corner. The latest work has now revealed a wholesale bakery next door, as well as the grand residence with its black room.

BBC/Tony Jolliffe Reception Hall

In the reception hall, rubble in the far right corner is from renovation at the time of the eruption (BBC)

The team is confident the three areas can be connected, physically via the plumbing and by particular passageways, but also in terms of their ownership.

The identity of this individual is hinted at in numerous inscriptions with the initials “ARV”. The letters appear on walls and even on the bakery’s millstones.

Dr Sophie Hay explained how a rich politician left his mark on the buildings

“We know who ARV is: he’s Aulus Rustius Verus,” explained park archaeologist Dr Sophie Hay. “We know him from other political propaganda in Pompeii. He’s a politician. He’s super-rich. We think he may be the one who owns the posh house behind the bakery and the laundry.” What’s clear, however, is that all the properties were undergoing renovation at the time of the eruption. Escaping workers left roof tiles neatly stacked; their pots of lime mortar are still filled, waiting to be used; their trowels and pickaxes remain, although the wooden handles have long since rotted away.

Dr Lia Trapani catalogues everything from the dig. She reaches for one of the thousand or more boxes of artefacts in her storeroom and pulls out a squat, turquoise cone. “It’s the lead weight from a plumb line.” Just like today’s builders, the Roman workers would have used it to align vertical surfaces.

She holds the cone between her fingers: “If you look closely you can see a little piece of Roman string is still attached.”

BBC/Tony Jolliffe Plumb line

It’s possible to see a remnant piece of string around the neck of the plumb line (BBC)

Dr Alessandro Russo has been the other co-lead archaeologist on the dig. He wants to show us a ceiling fresco recovered from one room. Smashed during the eruption, its recovered pieces have been laid out, jigsaw-style, on a large table.

He’s sprayed the chunks of plaster with a mist of water, which makes the detail and vivid colours jump out.

You can see landscapes with Egyptian characters; foods and flowers; and some imposing theatrical masks.

“This is my favourite discovery in this excavation because it is complex and rare. It is high-quality for a high-status individual,” he explained.

BBC/Jonathan Amos Ceiling fresco

The archaeologists have had to piece together a ceiling fresco that was shattered during the volcanic eruption (BBC)

But if the grand property’s ceiling fresco can be described as exquisite, some of what’s being learned about the bakery speaks to an altogether more brutal aspect of Roman life – slavery.

It’s obvious the people who worked in the business were kept locked away in appalling conditions, living side by side with the donkeys that turned the millstones. It seems there was one window and it had iron bars to prevent escape.

It’s in the bakery also that the only skeletons from the dig have been discovered. Two adults and a child were crushed by falling stones. The suggestion is they may have been slaves who were trapped and could not flee the eruption. But it’s guesswork.

“When we excavate, we wonder what we’re looking at,” explained co-lead archaeologist Dr Gennaro Iovino.

“Much like a theatre stage, you have the scenery, the backdrop, and the culprit, which is Mount Vesuvius. The archaeologist has to be good at filling in the gaps – telling the story of the missing cast, the families and children, the people who are not there anymore.”

BBC/Tony Jolliffe Mosaic floor
There are certainly more than a million tiles in the mosaic floor, possibly up to three million (BBC)
BBC/Tony Jolliffe Roman lamp
Boxes full of artefacts: One of the many oil lamps recovered during the excavation (BBC)
BBC/Tony Jolliffe Fresco showing Leda and the Swan
Another fresco depicts Leda and Zeus in the form of a swan, whose union would lead to Helen’s birth (BBC)
BBC/Tony Jolliffe A piece of moulded cornicing painted in bright colours
Brilliant colours: Ornate cornicing was also preserved under the volcanic debris (BBC)
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Democracy continuing to be derailed in South Asia

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A scene from Sri Lanka’s ‘Aragalaya’ of 2022.

Sections of progressive opinion in Sri Lanka are currently commemorating the second anniversary of the country’s epochal ‘Aragalaya’, which brought down the dictatorial and racist Gotabhaya Rajapaksa regime. April 9th 2022 needs to be remembered especially as the date on which Sri Lankans in their tens of thousands, irrespective of ethnic, religious and language differences rose as one to impress on the country’s political class and rulers that their fundamental rights cannot be compromised or tampered with for whatever reason and that these rights should be realized henceforth.

During the ‘Aragalaya’, Sri Lanka attained nationhood, since the totality of the country’s social groups, standing shoulder-to-shoulder, spoke out for equity and equality among them, from the same platform. Thus was Sri Lankan nationhood born, which is quite different from statehood. It is left to progressives to ensure that Sri Lankan nationhood, thus born out of the ‘Aragalaya’, does not prove to be stillborn.

To express it briefly, political ‘Independence’ or statehood is believed by most Sri Lankans to have been attained in 1948 but this is not tantamount to achieving nationhood. The latter is realized when equity and equality are established among a country’s communities.

Of course, we are a long way from achieving these aims but the historic significance of the ‘Aragalaya’ consists in the fact that the ideals central to nationhood were articulated assertively and collectively in Sri Lanka as never before. The opinion climate conducive to nation-building, it could be said, was created by the ‘Aragalaya’.

It is left to the progressives of Sri Lanka to forge ahead with the process of realizing the ideals and central aims of the ‘Aragalaya’, without resorting to violence and allied undemocratic approaches, which are really not necessary to bring about genuine democratic development.

The ‘Aragalaya’ was a historic ‘wake-up’ call to the country’s political elite in particular, which, over the years could be said to have been engaged more in power aggrandizement, rather than nation-building, which is integral to democratic development. Given this bleak backdrop, it amounts to a huge joke for any prominent member of the country’s ruling class to make out that he has been ‘presiding over the only country in Asia where democracy is completely safeguarded.’

To begin with, a huge question mark looms over Sri Lanka’s true constitutional identity. It is not a fully-fledged parliamentary democracy in view of the substantive and sweeping powers wielded by the Executive Presidency and this issue has been discussed exhaustively in this country.

On the other hand, Sri Lanka is not free of strong theocratic tendencies either because there is no clear ‘separation wall’, so to speak, between religion and politics. The fact is that Sri Lanka’s rulers are constitutionally obliged to defer to the opinion of religious leaders. Therefore, Sri Lanka lacks a secular foundation to its political system. This columnist is inclined to the view that in terms of constitutional identity, Sri Lanka is ‘neither fish, flesh nor fowl.’

Moreover, the postponement of local and Provincial Council polls in Sri Lanka by governments alone proves that what one has in Sri Lanka is at best a ‘façade democracy’.

derailing democracy in Sri Lanka goes Religious and ethnic identities in particular continue to be exploited and manipulated by power aspirants and political entrepreneurs to the huge detriment of the countries concerned.

Needless to say, such factors are coming into play in the lead-up to India’s Lok Sabha polls. They are prominent in Pakistan, Sri Lanka and Bangladesh as well. Statesmanship is a crying need in these societies but nurturing such leaders into existence will prove a prolonged, long term project, which also requires the interplay of a number of vital factors, many of which are not present to the desired degree in the countries concerned.

However, of the ‘South Asian Eight’, India is by far the most advanced democracy. It has a Constitution that explicitly enshrines the cardinal rights of the people, for example, including the very vital Right to Life. Such a right is non-existent in the Sri Lankan Constitution, for instance, and this is a huge drawback from the viewpoint of democratic development. Among other things, what this means is that the Sri Lankan state exercises substantive coercive power over its citizens.

On the other hand, the Indian Supreme Court has time and again creatively interpreted the Right to Life, so much so life-threatening conditions faced by Indian citizens, for instance, have been eliminated through the caring and timely intervention of the country’s judiciary. Sri Lanka needs to think on these things if it intends to entrench democratic development in the country. Thus far, the country’s track record on this score leaves much to be desired.

A predominant challenge facing progressives of South Asia, such as the ‘Aragalaists’ of Sri Lanka, is how to forge ahead with the task of keeping democratization of the state on track. A negative lesson in this connection could be taken from Bangladesh where the ideals of the 1971 liberation war under Shiekh Mujibhur Rahman were eroded by subsequent regimes which exploited divisive religious sentiments to come to power. In the process, religious minorities came to be harassed, persecuted and savaged by extremists in the centre.

Whereas, the founding fathers of Bangladesh had aimed to create a secular socialist state, this was not allowed to come to pass by some governments which came to power after the Sheikh, which sought to convert Bangladesh into a theocracy. A harrowing account of how the ideals of 1971 came to be betrayed is graphically provided in the international best seller, ‘Lajja’ by Taslima Nasrin, the exiled human and women’s right activist of Bangladesh.

At page 60 of the 20th anniversary edition of ‘Lajja’, published by Penguin Books, Nasrin quotes some persons in authority in Bangladesh as telling the country’s Hindus during the religious riots of 1979; ‘The government has declared that Islam is the state religion. If you want to stay in an Islamic country all of you must become Muslims. If you don’t become Muslims you will have to run away from this country.’

Not all the post-liberation governments of Bangladesh have turned against the ideals of 1971 and the present government is certainly not to be counted as one such administration. But the lesson to be derived from Bangladesh is that unless progressive opinion in a secular democracy is eternally vigilant and proactively involved in advancing democratic development, a country aiming to tread the path of secularism and democracy could easily be preyed upon by the forces of religious extremism.

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Homemade…to beat the heat

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With lots of holidays cropping up, we are going to be on the move. Ok, that’s fine, but what about the scorching heat! With temperatures soaring sky high, skin issues are bound to surface.

Well, here are some beauty tips that will give your skin some relief:

Aloe Vera: Apply fresh aloe vera gel to the skin. It helps to soothe and heal sunburn. Aloe vera contains zinc, which is actually anti-inflammatory.

Papaya: Papaya pulp can be applied on the skin like a mask, washing it off after 20 minutes. Papaya contains enzymes and helps to remove dead skin cells. Add curd or lemon juice to the pulp to remove tan. Fruits like banana, apple, papaya and orange can be mixed together and applied on the face. Keep it on for 20 to 30 minutes. Papaya helps to cleanse dead skin cells. Banana tightens the skin. Apple contains pectin and also tones the skin. Orange is rich in Vitamin C. It restores the normal acid-alkaline balance.

 Lemon Juice: Lemon is a wonderful home remedy for sun tan because of its bleaching properties. You can apply lemon juice by mixing it with honey on the tanned skin and leave it for 10 to 15 minutes before washing it off .

Coconut Water and Sandalwood Pack: Sandalwood has great cleansing properties, whereas, coconut water is widely known for a glowing skin. Mix coconut water with one tablespoon of sandalwood powder to make a thick mixture and apply it all over the face. Wash it off after 20 minutes. This is a perfect cure for tanned skin.

Cucumber, Rose Water and Lemon Juice:The cucumber juice and rose water work as a cooling means for soothing the brown and red-spotted skin. To use these effectively, take one tablespoon of cucumber juice, lemon juice, and rose water and stir it well in a bowl. Use this solution on all over the face and wash it off with cold water after 10 minutes. This helps to turn your skin hale and healthy.

Milk Masks: Yes, milk masks do give glowing effect to tired skin. Just apply milk mixed with glycerin all over the face. Relax for 15 minutes and rinse with water. The treatment softens, rejuvenates and restores a natural PH balance, thus protecting the skin from the negative effects of the sun. You can also take half cup of milk and add a pinch of turmeric in it. Apply the mixture on your face and wait till it gets dry. Use this solution on a daily basis for exceptional results.

(Yes, time to take care of your skin and beat the heat!)

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