Portfolio Selection
Portfolio variance depends on individual component variance AND correlation between components
This foundational paper established modern portfolio theory, demonstrating mathematically that diversification reduces risk through imperfect correlation between assets. Markowitz won the Nobel Prize in Economics in 1990 for this work.
The chapter shows that the identical mathematics applies to ecosystems: when species abundances (or business unit revenues) are imperfectly correlated, the system-level variance decreases even as component-level variance remains high. The portfolio variance formula from finance applies directly to ecological diversity-stability relationships.
This citation bridges finance and ecology, showing that portfolio theory isn't merely analogous to biodiversity insurance - it's mathematically identical. Organizations can apply the same quantitative framework used by investors to design resilient business portfolios.
Key Findings from Markowitz (1952)
- Portfolio variance depends on individual component variance AND correlation between components
- As long as components aren't perfectly correlated (ρ < 1), adding more components reduces total variance
- Diversification reduces risk without necessarily reducing expected returns
- Optimal portfolios balance risk and return through strategic asset allocation