Finance: The Modern Portfolio Theory

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 portfolio for risk-averse investors based on the level of risk in the market.

Finance: The Modern Portfolio Theory The emphasis of MPT is on risk being an inherent part of maximising returns.

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Thibaut De Roux

MPT FORMS THE BASIS OF ANOTHER INVESTMENT STRATEGY KNOWN AS RISK PARITY. ORIGINS MPT was first pioneered in a paper titled “Portfolio Selection�, published by Harry Markowitz in The Journal of Finance in 1952. Markowitz was later presented with the Nobel Prize for his development of this theory. Markowitz posited that an efficient frontier of optimal portfolios could be constructed to offer maximum returns at a pre-determined level of risk.

INVESTMENT IN CONTEXT Markowitz argued that the risk and return characteristics of each individual investment were less important than how that investment affects the overall risk to return ratio of the entire portfolio. The basis for constructing a portfolio 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.

Thibaut De Roux

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You can read more about the risk parity approach by visiting the blog of Thibaut de Roux.