Post-Modern Portfolio Theory - PMPT

DEFINITION of 'Post-Modern Portfolio Theory - PMPT'

A portfolio optimization methodology that uses the downside risk of returns instead of the mean variance of investment returns used by modern portfolio theory. The difference lies in each theory's definition of risk, and how that risk influences expected returns. Post-Modern Portfolio Theory (PMPT) uses the standard deviation of negative returns as the measure of risk, while modern portfolio uses the standard deviation of all returns as a measure of risk.

BREAKING DOWN 'Post-Modern Portfolio Theory - PMPT'

The differences between risk, as defined by the standard deviation of returns, between the post-modern portfolio theory and modern portfolio theory is the key factor in portfolio construction. Modern portfolio theory assumes that symetrical risk whereas PMPT assumes asymetrical risk. Downside risk captures what investors fear: having negative returns. After all, high positive returns are viewed as a good thing!

RELATED TERMS
  1. Modern Portfolio Theory - MPT

    A theory on how risk-averse investors can construct portfolios ...
  2. Safety-First Rule

    Within the context of post-modern and modern portfolio theory, ...
  3. Homogeneous Expectations

    An assumption in Markowitz Portfolio Theory that all investors ...
  4. Portfolio Variance

    The measurement of how the actual returns of a group of securities ...
  5. Mean-Variance Analysis

    The process of weighing risk against expected return. Mean variance ...
  6. Portfolio Return

    The monetary return experienced by a holder of a portfolio. Portfolio ...
Related Articles
  1. Professionals

    Investment Theory and Portfolio Development

    Investment Theory and Portfolio Development
  2. Mutual Funds & ETFs

    Modern Portfolio Theory (MPT)

    Modern Portfolio Theory (MPT)
  3. Options & Futures

    Financial Concepts: The Optimal Portfolio

    The optimal portfolio concept falls under the modern portfolio theory. The theory assumes (among other things) that investors fanatically try to minimize risk while striving for the highest ...
  4. 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.
  5. Investing Basics

    Modern Portfolio Theory vs. Behavioral Finance

    Modern portfolio theory and behavioral finance represent differing schools of thought that attempt to explain investor behavior. Perhaps the easiest way to think about their arguments and positions ...
  6. Fundamental Analysis

    7 Controversial Investing Theories

    We take a closer look at the theories that attempt to explain and influence the market.
  7. 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 ...
  8. Professionals

    Portfolio Management Theories

    CFA Level 1 - Portfolio Management Theories. Learn the main theories behind portfolio management. Includes information on risk aversion, Markowitz theory and the efficient frontier.
  9. 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 owner’s risk tolerance.
  10. 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 ...
RELATED FAQS
  1. 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 >>
  2. 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 >>
  3. What types of assets lower portfolio variance?

    Learn what type of assets reduce portfolio variance and how modern portfolio theory uses correlation coefficients. Read Answer >>
  4. What is the difference between the expected return and the standard deviation of ...

    Learn about the expected return and standard deviation and the difference between the expected return and standard deviation ... Read Answer >>
  5. 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 >>
  6. 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 >>
Hot Definitions
  1. Law Of Demand

    A microeconomic law that states that, all other factors being equal, as the price of a good or service increases, consumer ...
  2. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  3. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  4. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  5. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  6. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
Trading Center