Modern Portfolio Theory - MPT

Modern Portfolio Theory - MPT

A theory on how risk-averse investors can construct portfolios in order to optimize market risk for expected returns, emphasizing that risk is an inherent part of higher reward. Also called portfolio theory or portfolio management theory.

Notes:

According to the theory, it's possible to construct an 'efficient frontier' of optimal portfolios offering the maximum possible expected return for a given level of risk. This theory was pioneered by Harry Markowitz in his paper "Portfolio Selection," published in 1952 by the Journal of Finance.

There are four basic steps involved in the portfolio construction:
-Security Valuation
-Asset Allocation
-Portfolio Optimization
-Performance Measurement

See also: Covariance, Efficient Frontier, Portfolio, Risk