Higher Risk. Higher Return? Not Quite.

Dear Reader,

If I asked you to explain investing in a single sentence, chances are you’d say something remarkably close to this: Higher risk. Higher return.

It’s one of those ideas we inherit long before we think to question it. Much like the sun rising in the east, we accept it without hesitation. We repeat it in classrooms, hear it in boardrooms, and instinctively reach for it whenever someone asks why an investment promises outsized returns.

And why wouldn’t we? It underpins how portfolios are built, how institutions allocate capital, and ultimately how trillions of dollars are invested around the world. More than that, it shapes how we think about investing itself. IIt has become one of the closest things investing has to a law of nature.

Until someone decided to test the law.

In 1952, that someone was a 24-year-old doctoral student at the University of Chicago named Harry Markowitz.

The timing couldn’t have been more interesting. The Second World War had ended less than a decade earlier. Wall Street was finding its feet again. Investing was largely about finding the best securities. A good portfolio was simply assumed to be a collection of good investments. Diversification existed, of course, but more as common wisdom than as something that could be measured.

Markowitz wasn’t convinced that was enough. While everyone else was analysing the investment, he believed the thing worth analysing was the portfolio.He wasn’t trying to predict the next great company or build a fortune. He was trying to answer a question that, surprisingly, nobody had answered rigorously before.

Can a portfolio be designed to deliver better returns without proportionately taking more risk?

The question sounds almost obvious today. In 1952 it was heresy.

Markowitz distilled his thinking into a fourteen-page paper titled Portfolio Selection. When he later defended it as his doctoral thesis, Milton Friedman reportedly questioned whether it was economics at all. The work relied so heavily on mathematics that it seemed to belong in another discipline. The dissertation was eventually approved, but the scepticism captured just how radical the idea felt at the time. Modern investing dismissed the very idea that would later reshape it.

Nearly four decades later, that same idea earned Markowitz the Nobel Prize in Economic Sciences. It also gave the world one of the most influential charts in investing.

The chart that transformed investing

At first glance, the Efficient Frontier seems to reinforce the very idea we started with. Move further along the curve and expected returns rise. Higher risk. Higher return.

But that isn’t the breakthrough. Markowitz showed that risk and return are determined not just by the investments you own, but by how those investments interact inside a portfolio. The portfolio, rather than the individual investment, became the real unit of analysis.

That single insight transformed diversification. Until then, diversification was little more than common wisdom: don’t put all your eggs in one basket. Markowitz turned it into something that could be measured, tested and optimised. Investors no longer had to ask, “Which investment is the best?” They could instead ask, “Which combination of investments creates the best portfolio?” It was a subtle shift in thinking, but one that fundamentally changed modern investing.

Over the years, this way of thinking became the foundation of institutional investing. Pension funds, endowments, sovereign wealth funds and family offices around the world stopped thinking in terms of individual investments and started thinking in terms of portfolios.

But when Markowitz published Portfolio Selection in 1952, the investable universe was remarkably simple. Institutional portfolios were largely built using public equities and bonds. Today, the opportunity set looks very different.

Which raises an obvious question.

If the Efficient Frontier represents the best possible portfolio using the asset classes available at that time, what happens when entirely new asset classes enter the equation?

To answer that, we need to bring the conversation a little closer to home.

For most of us, the idea of a “portfolio” came with a familiar image. We built wealth through fixed deposits, PPF, gold and perhaps a second home. Equities, for many households, came much later. Mutual funds only entered the mainstream over the past two decades, fuelled by the rise of SIPs and a generation that began thinking differently about investing.

Institutional portfolios in India have followed a similar journey. They were largely confined to traditional asset classes, shaped by regulation, limited access and a relatively young private capital ecosystem. As that ecosystem has matured, so has the opportunity within it

India’s AIF industry is only about fifteen years old, growing with a CAGR of 30% over the past 5 years. Yet in that relatively short time, stronger fund managers have emerged, successful exits have built confidence, and access to private markets has expanded significantly. What was once considered a niche allocation is increasingly becoming a part of long-term portfolios.

Which brings us back to the question we left hanging.

If the Efficient Frontier changes when the opportunity set expands, what does it look like in a world where private markets become part of the portfolio?

If private markets are increasingly becoming part of the modern Indian portfolio, what does that actually mean for portfolio construction? Does adding an entirely new asset class simply expand the menu of investments, or can it fundamentally improve the portfolio itself?

To answer that, we turn to one of the most widely referenced frameworks in institutional investing, one that builds directly on Markowitz’s original idea.

A study by Cambridge Associates ( A Classic) illustrates what happens when private markets enter the portfolio equation.

By now, this newsletter has probably started to feel a little more like a finance class than our usual editions. Bear with me for one more minute, because this is where Markowitz’s idea becomes tangible.

The chart answers a simple question: What happens when private markets become part of the portfolio?

The answer isn’t that returns magically increase, nor that portfolios simply become riskier. The opportunity set itself expands. By introducing an asset class that behaves differently from stocks and bonds, investors create more possible portfolio combinations. With more combinations comes a greater chance of building a portfolio that delivers the same expected return with less risk or a higher expected return without proportionately more risk.

The lighter curve doesn’t replace the darker one. It simply sits above it. In other words, the “best possible portfolio” changes because the building blocks have changed.

Perhaps that’s the most enduring lesson from Markowitz. The Efficient Frontier was never meant to be fixed. As the investable universe evolves, so too does the frontier. Theory, however, is only useful if it works in practice.

That brings us to one of the most influential institutional portfolios ever built.

The contrast is striking. While the average endowment continued to allocate most of its capital to public equities and fixed income, Yale made private markets and alternatives the cornerstone of its portfolio. This wasn’t simply a different asset allocation—it was a different philosophy of portfolio construction.

More importantly, Yale showed that Markowitz’s ideas could extend well beyond theory. Its success transformed institutional investing, inspiring endowments, foundations, pension funds and family offices around the world to rethink how portfolios were built and to steadily increase allocations to private markets.

Over the past three decades, institutions around the world have gradually reimagined how portfolios are built. India is now entering a similar phase. Public markets have matured, private markets have deepened, and investors have access to an opportunity set that simply didn’t exist a decade ago.

That doesn’t automatically make portfolios better. It simply makes portfolio construction more important than ever. And perhaps that’s the biggest lesson we took away while researching this piece. Harry Markowitz’s most enduring contribution was a shift in perspective. He reminded us that the portfolio, not the individual investment, is ultimately the product.

That belief shapes how we think at Oister as well. When we study global institutions, benchmark fund managers, or spend time understanding how private markets are evolving, it isn’t because we’re trying to find the next exciting asset class. It’s because we believe better portfolios are built through better research, better product design and a deeper understanding of how different investments work together over the long term.

This edition of The Unlisted Intel was a little more technical than our usual ones, so thank you for staying with us. If you enjoyed this format, we’ll continue sharing some of the research, frameworks and ideas that shape how we think about private markets and portfolio construction.

Because in the end, investors don’t experience individual investments. They experience portfolios. And that’s the product we’re all trying to build better.

Jai Hind

Chief Brand & Investor Relations Officer

Sneha Dadrwal

Frequently Asked Questions

Q: What common investing belief does this article challenge?

A: The idea that "higher risk equals higher return" is treated almost like a law of nature in investing. The article argues this oversimplifies things — how a portfolio is constructed matters just as much as the risk taken.

Q: Who was Harry Markowitz and why is he central to this piece?

A: A 24-year-old doctoral student at the University of Chicago who, in 1952, asked whether a portfolio could be designed to deliver better returns without proportionately more risk. His paper, Portfolio Selection, was initially met with skepticism (Milton Friedman reportedly questioned if it was even economics), but it later won him the Nobel Prize in Economic Sciences.

Q: What was Markowitz's key breakthrough?

A: He shifted the unit of analysis from the individual investment to the portfolio itself — showing that risk and return depend on how investments interact together, not just their individual merits. This turned diversification from folk wisdom into something measurable and optimizable.

Q: What is the Efficient Frontier, and what does it really show?

A: It's a chart plotting the maximum possible return for any given level of risk. The key insight isn't just that returns rise with risk along the curve — it's that two portfolios can carry identical risk while one delivers meaningfully higher returns, purely through smarter construction.

Q: What happens to the Efficient Frontier when private markets are added?

A: Using Cambridge Associates data, the article shows the frontier shifts upward — at the same 5% risk level, adding private assets generated roughly 160 bps (1.6%) more annual return without taking on extra risk.

Q: What is the Yale Model, and why is it mentioned?

A: It's Yale's endowment strategy, which allocated heavily to venture capital, buyouts, real estate, and absolute return strategies — far more than the average endowment's public equity/fixed income-heavy approach. It's used as proof that Markowitz's theory works in practice, not just on paper.

Q: How does this connect to India's investing landscape?

A: Indian portfolios traditionally leaned on fixed deposits, PPF, gold, and more recently mutual funds/SIPs. India's AIF industry, though just ~15 years old, has grown at a 30% CAGR over the past 5 years — suggesting private markets are becoming a meaningful part of the modern Indian portfolio, mirroring the global institutional shift Yale pioneered.