Modern Portfolio Theory
Modern Portfolio Theory (MPT) is a framework for constructing portfolios that aim to maximize expected return for a given level of risk, or minimize risk for a given level of expected return, through diversification and mean-variance optimization. It rests on the idea that portfolio risk and return can be characterized by the averages and covariances of asset returns.
Example: A financial planner uses Modern Portfolio Theory to select a diversified mix of assets that lies on the efficient frontier for a stated expected return.
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