PORTFOLIO THEORY WHEN INVESTMENT RELATIVES ARE LOGNORMALLY DISTRIBUTED.

The article proposes to reformulate portfolio theory under the assumption that investment relatives are lognormally distributed. Portfolio theory is shown to be correct under assumptions that returns are normally distributed and the investor's utility function is quadratic. Several reasons for questioning and challenging these assumptions are discussed, such as the unrealistic implications of the utility function. The authors present an algorithm for determining portfolios in an efficient set theorem and discuss the implications for the marginal utility of investors.