The goal of this paper is to motivate the use of efficient set mathematics for portfolio analysis [as seen in Roll, 1977] in the classroom. Many treatments stop at the two asset portfolio case (avoiding the use of matrix algebra) and an alarming number of treatments rely on illustration and templates to provide a heuristic sense of the material without really teaching how efficient portfolios are generated. This is problematic considering that the benefits of understanding efficient set mathematics go beyond portfolio analysis and into such topics as regression analysis (as demonstrated here).
Copyright © 2002 Financial Education Association. This article first appeared in Journal of Financial Education 28 (Fall/Winter 2002): 79-96.
Please note that downloads of the article are for private/personal use only.
Arnold, Tom. "Advanced Portfolio Theory: Why Understanding The Math Matters." Journal of Financial Education 28 (Fall/Winter 2002): 79-96.