The approach to asset allocation pioneered by Markowitz in the late 1950s and developed over the next five decades truly changed the investment landscape. As we mentioned in our Introduction, it was not much earlier that asset allocation and stock-picking were fundamentally equivalent with identifying the investment opportunity with the highest expected return (see, e.g., Williams 1938).

There are two distinct insights in the Markowitz's approach: the first is that, for most plausible ‘utility functions’ (i.e., behavioural responses to certain and uncertain changes in consumptions), risk and return are inextricably linked. The second insight points to the importance of diversification in appraising a given investment opportunity given the available universe of investable assets.

One may disagree with the particular statistic used by Markowitz to describe ‘risk’ (variance); one may argue that correlation is too crude a tool to describe diversification – but these objections simply point to refinements of Markowitz's original insight. Some modern philosophers have argued that all of Western philosophy is a series of footnotes to the work of Plato. We do not know whether this is tenable, but we certainly believe that most of modern investment theory is a series of footnotes to Markowitz's work.

These observations are simply meant to stress that, for all the apparent differences our approach presents with respect to a classic mean-variance optimization problem, we work fully in the conceptual furrow first ploughed by Markowitz.