Implications of Modern Portfolio Theory for Life Assurance Companies.

The general literature on the topic of Modern Portfolio Theory (M.P.T.) is now quite copious but in order to make this paper more self sufficient than it might otherwise be I make no apologies for repeating what is available outside United Kingdom actuarial literature. There are not very many actuarial papers advocating the use of M.P.T. which might suggest that many actuaries practising the techniques of M.P.T. have not been convinced that their work is conclusive. Moore's paper (1) in 1972 laid the groundwork for discussion of the models of M.P.T. by the profession. In 1977 Holbrook (6) discussed in his more general paper on pension fund performance the relevance of risk and return by summarizing the work of Treynor, Sharpe and Fama. There have been two recent papers from north of the border. The 1980 paper by Pountain and Fitzgerald (12) is the earlier. Clarkson's paper (16) to the Faculty contains a particularly interesting section in which he compares his own model for managing an ordinary share portfolio with the methodology of M.P.T.