The modern portfolio theory (also known as MPT) is a form of investment portfolio strategy that attempts to optimise returns on a portfolio for risk-averse investors based on the level of risk in the market.
1. FINANCE:
THE MODERN
PORTFOLIO THEORY
The modern portfolio theory (also known as
MPT) is a form of investment portfolio strategy
that attempts to optimise returns on a portfo-
lio for risk-averse investors based on the level
of risk in the market.
2. 2 Thibaut De Roux
The emphasis of MPT is on
risk being an inherent part of
maximising returns.
Finance:
The Modern
Portfolio Theory
3. 3Thibaut De Roux
MPT was first pioneered in a paper tit-
led “Portfolio Selection”, published by
Harry Markowitz in The Journal of Fi-
nance in 1952. Markowitz was later
presented with the Nobel Prize for his
development of this theory. Markowitz
posited that an efficient frontier of op-
timal portfolios could be constructed to
offer maximum returns at a pre-deter-
mined level of risk.
Markowitz argued that the risk and re-
turn characteristics of each individual
investment were less important than
how that investment affects the overall
risk to return ratio of the entire portfo-
lio. The basis for constructing a portfo-
lio with the lowest possible level of risk
involves using statistical measures such
as correlation and variance, evaluating
each investment in the context of how it
works within the portfolio, rather than
on its individual potential for reward.
ORIGINS
INVESTMENT IN
CONTEXT
MPT FORMS THE BASIS OF ANOTHER
INVESTMENT STRATEGY KNOWN AS
RISK PARITY.