The foundation for United Capital Management, Modern Portfolio Theory, is a revolutionary view of the stock market that illustrates how investment risk may be reduced by spreading investments in specific proportions among different categories. This is called asset allocation, a strategic approach to investment management designed to help minimize the potential risks associated with routine market fluctuations.

          Annualized Portfolio Return vs. Risk for Various Asset Allocations

The developers of Modern Portfolio Theory, Harry Markowitz, Merton Miller and William Sharpe were awarded the Nobel Prize in Economic Science in 1990 for their contributions.

	Harry M. Markowiz Nobel Prize Winner, 1990. As a graduate student in economics at the University of Chicago, Dr. Markowitz first studied portfolio design and risk reduction in his paper, "Portfolio Selection", published in the 1952 Journal of Finance. Thirty-eight years later, he shared the Nobel Prize in Economic Sciences with Merton Miller and William Sharpe for developing the theory of portfolio choice, one of the primary concepts crucial to the development of Modern Portfolio Theory.
	Merton Miller Nobel Prize Winner, 1990. Miller, a Harvard graduate, worked at the U.S. Treasury and Federal Reserve before earning his Ph.D. from Johns Hopkins University. He taught at Carnegie Tech, where he met Franco Modigliani (Nobel Prize winner 1985) and together they made economic history with the"M&M theorem." Miller's work on the effect of firms' capital structure and dividend policy on market price along with the work of Markowitz and Sharpe contributed to the development of Modern Portfolio Theory.
	William F. Sharpe Nobel Prize Winner, 1990. Sharpe was one of the originators of the capital asset pricing model (the device that gave Wall Street the concept of the "beta"), developed the Sharpe Ratio for investment performance analysis, the binomial method for the valuation of options, the gradient method for asset allocation optimizations, and returns-based style analysis for evaluating the style and performance of investment funds.

All asset classes have both potential risks and potential rewards associated with them. There is no single investment vehicle that combines the potential rewards of an asset class and eliminates the risks. However, several investments representing selected asset classes can be combined to reduce investment risks and help pursue more consistent returns.

How critical is asset allocation? Studies show that over time, strategic asset allocation is the major determinant of investment portfolio performance and determines the majority of the variability of returns. However, asset allocation does not assure a profit or protect against losses in a declining market. Furthermore, as the pie chart below shows, tactical asset allocation and security selection should also be key parts of the investment process for investors.

Learn more about how we help our clients ->