Hindawi Publishing Corporation Chinese Journal of Mathematics Volume 2015, Article ID 737905, 17 pages http://dx.doi.org/10.1155/2015/737905 Research Article Classical Ergodicity and Modern Portfolio Theory Geoffrey Poitras and John Heaney Beedie School of Business, Simon Fraser University, Vancouver, BC, Canada V5A lS6 Correspondence should be addressed to Geoffrey Poitras;
[email protected] Received 6 February 2015; Accepted 5 April 2015 Academic Editor: Wing K. Wong Copyright © 2015 G. Poitras and J. Heaney. This is an open access article distributed under the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited. What role have theoretical methods initially developed in mathematics and physics played in the progress of financial economics? What is the relationship between financial economics and econophysics? What is the relevance of the “classical ergodicity hypothesis” to modern portfolio theory? This paper addresses these questions by reviewing the etymology and history of the classical ergodicity hypothesis in 19th century statistical mechanics. An explanation of classical ergodicity is provided that establishes a connection to the fundamental empirical problem of using nonexperimental data to verify theoretical propositions in modern portfolio theory. The role of the ergodicity assumption in the ex post/ex ante quandary confronting modern portfolio theory is also examined. “As the physicist builds models of the movement of matter in a frictionless environment, the economist builds models where there are no institutional frictions to the movement of stock prices.” E. Elton and M. Gruber, Modern Portfolio Theory and Investment Analysis (1984, p. 273) 1.