Modern Portfolio Theory - MPT

What Does Modern Portfolio Theory - MPT Mean?
A theory on how risk-averse investors can construct portfolios to optimize or maximize expected return based on a given level of market risk, emphasizing that risk is an inherent part of higher reward.

Also called "portfolio theory" or "portfolio management theory."

Investopedia explains Modern Portfolio Theory - MPT
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 portfolio construction:
-Security valuation
-Asset allocation
-Portfolio optimization
-Performance measurement

Related Terms

Asset Allocation
Covariance
Efficient Frontier
Harry Markowitz
Mutual Fund Theorem
Optimization
Permanent Portfolio
Risk Measures
The Kelly Criterion
Treynor-Black Model
More Related Terms

Related Links

Modern Portfolio Theory: An Overview - See why investors today still follow this set of principles to reduce risk and increase returns through diversification.
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