Introduction  Modern Portfolio Theory (MPT)
Modern Portfolio Theory (MPT), a hypothesis put forth by Harry Markowitz in his paper "Portfolio Selection," (published in 1952 by the Journal of Finance) is an investment theory based on the idea that riskaverse 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. It is one of the most important and influential economic theories dealing with finance and investment.
Also called "portfolio theory" or "portfolio management theory," MPT suggests that it is possible to construct an "efficient frontier" of optimal portfolios, offering the maximum possible expected return for a given level of risk. It suggests that it is not enough to look at the expected risk and return of one particular stock. By investing in more than one stock, an investor can reap the benefits of diversification, particularly a reduction in the riskiness of the portfolio. MPT quantifies the benefits of diversification, also known as not putting all of your eggs in one basket.
Related Readings:
 Modern Portfolio Theory: Why It's Still Hip
 The History Of The Modern Portfolio
 Understanding Volatility Measurements
Consider that, for most investors, the risk they take when they buy a stock is that the return will be lower than expected. In other words, it is the deviation from the average return. Each stock has its own standard deviation from the mean, which MPT calls "risk."
The risk in a portfolio of diverse individual stocks will be less than the risk inherent in holding any one of the individual stocks (provided the risks of the various stocks are not directly related). Consider a portfolio that holds two risky stocks: one that pays off when it rains and another that pays off when it doesn't rain. A portfolio that contains both assets will always pay off, regardless of whether it rains or shines. Adding one risky asset to another can reduce the overall risk of an allweather portfolio.
In other words, Markowitz showed that investment is not just about picking stocks, but about choosing the right combination of stocks among which to distribute one's nest egg.
On the more technical side, there are five statistical risk measurements used in modern portfolio theory (MPT); alpha, beta, standard deviation, Rsquared and the Sharpe ratio. All of these indicators are intended to help investors determine a potential investment's riskreward profile.
SEE: 5 Ways To Measure Mutual Fund Risk

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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. 
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Manage Investments And Modern Portfolio Theory
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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. 
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Using Normal Distribution Formula To Optimize Your Portfolio
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The Workings Of Equity Portfolio Management
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The Dangers Of OverDiversifying Your Portfolio
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Fundamental Analysis
How To Manage Portfolio Risk
Follow these tips to successfully manage portfolio risk. 
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The Evolution of ETFs
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Homogeneous Expectations
An assumption in Markowitz Portfolio Theory that all investors ... 
Portfolio Investment
A holding of an asset in a portfolio. A portfolio investment ... 
Sharpe Ratio
The Sharpe Ratio is a measure for calculating riskadjusted return, ... 
Efficient Frontier
A set of optimal portfolios that offers the highest expected ... 
Dividend Irrelevance Theory
A theory that investors are not concerned with a company's dividend ... 
Portfolio Variance
The measurement of how the actual returns of a group of securities ...

Where did Modern Portfolio Theory (MPT) come from?
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How is portfolio variance reduced in Modern Portfolio Theory?
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How is risk aversion measured in Modern Portfolio Theory (MPT)?
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How is correlation used in modern portfolio theory?
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