Skip to Main Content
In the financial markets, there are different assets, such as stocks, bonds, foreign exchanges, options, commodities, real estates and future contracts, available for trading. The qualities of these assets vary from very good to extremely poor. Usually, it is difficult for investors to find out those good quality assets because of information asymmetry and asset price fluctuations. Therefore, it is not wise to use portfolio theory blindly for optimizing asset allocation among some low quality assets. The suitable way of constructing a portfolio is to select some good quality assets. Markowitz's portfolio theory only provides a solution to asset selection among the pre-determined assets.