Modern Portfolio Theory - MPT

AAA

DEFINITION of 'Modern Portfolio Theory - MPT'

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
  1. Portfolio Variance

    The measurement of how the actual returns of a group of securities ...
  2. Permanent Portfolio

    A portfolio construction theory devised by free-market investment ...
  3. Efficient Frontier

    A set of optimal portfolios that offers the highest expected ...
  4. Covariance

    A measure of the degree to which returns on two risky assets ...
  5. Optimization

    In the context of technical analysis, it is the process of adjusting ...
  6. Harry Markowitz

    A Nobel Memorial Prize winning economist who devised the modern ...
Related Articles
  1. Achieving Optimal Asset Allocation
    Investing Basics

    Achieving Optimal Asset Allocation

  2. How Risk Free Is The Risk-Free Rate ...
    Options & Futures

    How Risk Free Is The Risk-Free Rate ...

  3. Protect Your Foreign Investments From ...
    Mutual Funds & ETFs

    Protect Your Foreign Investments From ...

  4. The Workings Of Equity Portfolio Management
    Professionals

    The Workings Of Equity Portfolio Management

Hot Definitions
  1. Financing Entity

    The party in a financing arrangement that provides money, property, or another asset to an intermediate entity or financed ...
  2. Hyperinflation

    Extremely rapid or out of control inflation. There is no precise numerical definition to hyperinflation. Hyperinflation is ...
  3. Gross Rate Of Return

    The total rate of return on an investment before the deduction of any fees or expenses. The gross rate of return is quoted ...
  4. Debit Spread

    Two options with different market prices that an investor trades on the same underlying security. The higher priced option ...
  5. Leading Indicator

    A measurable economic factor that changes before the economy starts to follow a particular pattern or trend. Leading indicators ...
  6. Wage-Price Spiral

    A macroeconomic theory to explain the cause-and-effect relationship between rising wages and rising prices, or inflation. ...
Trading Center