Modern Portfolio Theory (MPT) is a framework for assembling a portfolio of investments, according to an investor's preferences and risk tolerance, that aims to maximize expected return for a given level of risk. The theory was developed by Harry Markowitz in the 1950s and has become a cornerstone of finance.

Key Concepts

  • Diversification: MPT emphasizes the importance of diversifying investments to reduce risk.
  • Risk and Return: The theory suggests that higher returns typically come with higher risk.
  • Efficient Frontier: This is the set of portfolios that offer the highest expected return for a given level of risk.

Applications

MPT has been widely used in the financial industry to help investors make informed decisions about their portfolios.

  • Asset Allocation: MPT can be used to determine the optimal mix of assets in a portfolio.
  • Risk Management: It helps in understanding and managing the risks associated with different investments.

Further Reading

For a deeper understanding of Modern Portfolio Theory, you might want to explore the following resources:

Modern Portfolio Theory Diagram