‘Measuring the Effectiveness of a Trust Portfolio’s Diversification’

Edward A. Moses (Winter Park, Florida), J. Clay Singleton (Winter Park, Florida), and Stewart A. Marhall, III (Orlando, Florida), have published their article entitled Measuring the Effectiveness of a Trust Portfolio’s Diversification, 35 ACTEC Journal 303 (2009).  

The editor’s synopsis of the article is below:

Beginning in 2004, ACTEC Journal published four articles relating to the Prudent Investor Rule and Modern Portfolio Theory.  In the first article, the authors posed a question raised by many fiduciaries: “As a fiduciary do I have to employ the concepts of MPT (Modern Portfolio Theory)–after all, is not my reasonable business judgment sufficient?”  The authors responded to this question in their concluding section: “While there is no explicit requirement that the fiduciary use the mechanics of MPT, constructing a portfolio using business judgment alone is difficult to explain and support satisfactorily.  A more defensible practice would be for the fiduciary to begin with the portfolio recommended by MPT.”  The only reason to change the portfolio recommended by MPT at an appropriate risk level is to improve the portfolio’s diversification.  This article addresses how to measure explicitly the effectiveness of a portfolio’s diversification and provides justification for changing the portfolio’s composition from the one located on the Efficient Frontier.