Modern portfolio theory

Modern portfolio theory

Principals underlying the analysis and evaluation of rational portfolio choices based on risk return trade-offs and efficient diversification.

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modern portfolio theory

See portfolio theory.

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Modern portfolio theory. In making investment decisions, adherents of modern portfolio theory focus on potential return in relation to potential risk.

The strategy is to evaluate and select individual securities as part of an overall portfolio rather than solely for their own strengths or weaknesses as an investment.

Asset allocation is a primary tactic according to theory practitioners. That's because it allows investors to create portfolios to get the strongest possible return without assuming a greater level of risk than they are comfortable with.

Another tenet of portfolio theory is that investors must be rewarded, in terms of realizing a greater return, for assuming greater risk. Otherwise, there would be little motivation to make investments that might result in a loss of principal.