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Modern Portfolio Theory (MPT)

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Table of contents
    1. 0.2. How MPT Works
    2. 0.4. Importance of MPT

Modern Portfolio Theory (MPT) is a financial theory that aims to maximize return for a given level of risk by diversifying assets in a portfolio. It emphasizes the importance of balancing risk and reward by holding a variety of assets that are not perfectly correlated with each other.

How MPT Works

MPT suggests that investors can construct an optimal portfolio by combining assets with different risk levels. The goal is to minimize the overall risk of the portfolio while maximizing returns, by selecting assets that have a low correlation with each other.

Importance of MPT

MPT is a foundational concept in investment management, providing a framework for risk management and asset allocation. It is widely used to create diversified investment strategies, helping investors achieve optimal returns while managing risk.