DEFINITION of 'Homogeneous Expectations'
An assumption in Markowitz Portfolio Theory that all investors will have the same expectations and make the same choices given a particular set of circumstances. The assumption of homogeneous expectations states that all investors will have the same expectations regarding inputs used to develop efficient portfolios, including asset returns, variances and covariances. For example, if shown several investment plans with different returns at a particular risk, investors will choose the plan that boasts the highest return. Similarly, if investors are shown plans that have different risks but the same returns, investors will choose the plan that has the lowest risk.
BREAKING DOWN 'Homogeneous Expectations'
Harry Max Markowitz is an American economist known for his pioneering work in the theory of financial economics, and the publication of his essay "Portfolio Selection" (1952) and his 1959 book, "Portfolio Selection: Efficient Diversification." He was awarded the John von Neumann Theory Prize in 1989 and the Nobel Price in Economics in 1990.
Modern Portfolio Theory (MPT) was pioneered by Markowitz. The theory states that riskaverse investors can develop portfolios that optimize or maximize expected returns based on the particular level of market risk. According to the theory, there are four steps involved in the construction of a portfolio:
1. Security valuation  Describing various assets in terms of expected returns and risks
2. Asset allocation  Distributing various asset classes within the portfolio
3. Portfolio optimization  Reconciling risk and return in the portfolio
4. Performance measurement  Dividing each asset's performance into marketrelated and industryrelated classifications
Markowitz's work altered the way that people invested, emphasizing the importance of investment portfolios, risk and the relationships between securities and diversification. His work has been fundamental to the development of the capital asset pricing model.
Markowitz also described the "efficient frontier," a set of optimal portfolios that provide the best expected returns for a defined risk level or the lowest risk level for a defined expected return. Portfolios that fall outside the efficient frontier are considered suboptimal because they either carry too much risk relative to the return or too little return relative to the risk.

Harry Markowitz
A Nobel Memorial Prize winning economist who devised the modern ... 
Modern Portfolio Theory  MPT
A theory on how riskaverse investors can construct portfolios ... 
Efficient Frontier
A set of optimal portfolios that offers the highest expected ... 
Markowitz Efficient Set
A set of portfolios with returns that are maximized for a given ... 
PostModern Portfolio Theory  ...
A portfolio optimization methodology that uses the downside risk ... 
Portfolio Variance
The measurement of how the actual returns of a group of securities ...

Active Trading
Modern Portfolio Theory: Why It's Still Hip
See why investors today still follow this old set of principles that reduce risk and increase returns through diversification. 
Fundamental Analysis
Understanding Modern Portfolio Theory
Modern portfolio theory describes ways of diversifying assets in a portfolio in order to maximize the expected return given the ownerâ€™s risk tolerance. 
Investing Basics
Manage Investments And Modern Portfolio Theory
Modern Portfolio Theory suggests a static allocation which could be detrimental in declining markets, making it necessary for continuous risk assessment. Downside risk protection may not be the ... 
Fundamental Analysis
The History Of The Modern Portfolio
Learn how the writings of John Burr Williams and Harry Markowitz led to the creation of the investment portfolio. 
Investing Basics
Calculating Portfolio Variance
Portfolio variance is a measure of a portfolioâ€™s volatility, and is a function of two variables. 
Fundamental Analysis
How Investment Risk Is Quantified
FInancial advisors and wealth management firms use a variety of tools based in Modern portfolio theory to quantify investment risk. 
Bonds & Fixed Income
Find The Highest Returns With The Sharpe Ratio
Learn how to follow the efficient frontier to increase your chances of successful investing. 
Investing Basics
Explaining The Efficient Frontier
Most investment choices involve a tradeoff between risk and reward. The "Efficient Frontier" is a modern portfolio theory tool that shows investors the best possible return they can expect from ... 
Professionals
The Workings Of Equity Portfolio Management
Achieve analytical efficiency by applying your evaluation to a key set of stocks. 
Investing Basics
Using Normal Distribution Formula To Optimize Your Portfolio
Normal or bell curve distribution can be used in portfolio theory to help portfolio managers maximize return and minimize risk.

How is portfolio variance reduced in Modern Portfolio Theory?
Learn about modern portfolio theory, specifically what it asserts about asset allocation and managing portfolio risk through ... Read Answer >> 
What are the advantages of portfolio planning with the efficient frontier?
Learn about modern portfolio theory and the efficient frontier. Understand the advantages of portfolio planning with the ... Read Answer >> 
Why is risk return tradeoff important in designing a portfolio?
Learn how the risk return tradeoff is used in the construction of portfolios, and how modern portfolio theory seeks to diversify ... Read Answer >> 
Where did Modern Portfolio Theory (MPT) come from?
Learn about modern portfolio theory, or MPT, and its origins. MPT has become a standard paradigm through which investors ... Read Answer >> 
Can a mean variance analysis be done for any investment?
Learn how mean variance analysis is used in modern portfolio theory to create an optimal mix of assets to maximize return ... Read Answer >> 
How is correlation used in modern portfolio theory?
Discover how modern portfolio theory and the efficient frontier use correlation between investment assets to predict an optimal ... Read Answer >>