Postmodern Portfolio Theory

Navigating Abnormal Markets and Investor Behavior

  • James Ming Chen

Table of contents

  1. Front Matter
    Pages i-xx
  2. James Ming Chen
    Pages 1-2
  3. Perpetual Possibility in a World of Speculation: Portfolio Theory in Its Modern and Postmodern Incarnations

    1. Front Matter
      Pages 3-3
    2. James Ming Chen
      Pages 5-25
    3. James Ming Chen
      Pages 27-38
  4. Bifurcating Beta in Financial and Behavioral Space

  5. Τέσσερα, Τέσσερα: Four Dimensions, Four Moments

  6. Managing Kurtosis: Measures of Market Risk in Global Banking Regulation

  7. Back Matter
    Pages 331-339

About this book


This survey of portfolio theory, from its modern origins through more sophisticated, “postmodern” incarnations, evaluates portfolio risk according to the first four moments of any statistical distribution: mean, variance, skewness, and excess kurtosis. In pursuit of financial models that more accurately describe abnormal markets and investor psychology, this book bifurcates beta on either side of mean returns. It then evaluates this traditional risk measure according to its relative volatility and correlation components. After specifying a four-moment capital asset pricing model, this book devotes special attention to measures of market risk in global banking regulation.
Despite the deficiencies of modern portfolio theory, contemporary finance continues to rest on mean-variance optimization and the two-moment capital asset pricing model. The term postmodern portfolio theory captures many of the advances in financial learning since the original articulation of modern portfolio theory. A comprehensive approach to financial risk management must address all aspects of portfolio theory, from the beautiful symmetries of modern portfolio theory to the disturbing behavioral insights and the vastly expanded mathematical arsenal of the postmodern critique. Mastery of postmodern portfolio theory’s quantitative tools and behavioral insights holds the key to the efficient frontier of risk management.


mathematical finance asset pricing CAPM skewness behavioral economics risk aversion risk seeking behavioral portfolio theory SP/A theory equity premium puzzle Basel accords correlation volatility

Authors and affiliations

  • James Ming Chen
    • 1
  1. 1.College of LawMichigan State UniversityEast LansingUSA

Bibliographic information

Industry Sectors
Finance, Business & Banking