Harry Markowitz developed modern portfolio theory, making the tradeoff between expected return and variability a mathematical allocation problem. His 1952 Portfolio Selection by Harry Markowitz emphasizes that the variability of a combination depends on relationships between its components, not just on each component considered alone.[ref]
Portfolio Selection by Harry Markowitz. pp.79–82, expected return, covariance and portfolio variance
For an original toy example, let two return random variables each have variance one. Equal weighting givesWith zero covariance the result is ; with covariance one it is one. The calculation explains why counting assets alone does not determine diversification. Expected values, covariance estimates and allocation constraints supply distinct inputs to the optimization.
The 1990 economics prize recognized his theory of portfolio choice. The awarding academy's account identifies both the 1952 paper and his expanded 1959 treatment.[ref]
The Prize in Economic Sciences 1990 press release. 16 October 1990, Markowitz and portfolio selection
https://photoarchive.lib.uchicago.edu/db.xqy?show=browse8.xml%7C545. Named portrait record and credit
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