Modern Portfolio Theory (MPT)

Modern Portfolio Theory (MPT),

Definition of Modern Portfolio Theory (MPT):

  1. Modern portfolio theory argues that an investment's risk and return characteristics should not be viewed alone, but should be evaluated by how the investment affects the overall portfolio's risk and return. MPT shows that an investor can construct a portfolio of multiple assets that will maximize returns for a given level of risk. Likewise, given a desired level of expected return, an investor can construct a portfolio with the lowest possible risk. Based on statistical measures such as variance and correlation, an individual investment's performance is less important than how it impacts the entire portfolio.

  2. Modern portfolio theory (MPT) is a theory on how risk-averse investors can construct portfolios to maximize expected return based on a given level of market risk. Harry Markowitz pioneered this theory in his paper "Portfolio Selection," which was published in the Journal of Finance in 1952. He was later awarded a Nobel Prize for his work on modern portfolio theory.

  3. Set of concepts aimed at building a most efficient collection (portfolio) of different types of assets, based on the observation that although investors want high returns they dislike high risk (likelihood of the deviation of an actual return from the anticipated return). It suggests that the risk of a particular investment comprising a portfolio should be assessed on the basis of how its value varies in comparison with the market value of the entire portfolio, and not in isolation. And that a diversified portfolio of investments is efficient if it yields highest possible return for a given level of risk or incurs the lowest level of risk for a given amount of return. Developed by the Nobel laureate (1990) US economist Harry Markovitz (born 1927) in the early 1950s, it enables an investor to estimate and control the type and extent of return and the associated risk. Also called modern investment theory or portfolio theory. See also capital market theories and sharpe ratio.

How to use Modern Portfolio Theory (MPT) in a sentence?

  1. Modern portfolio theory is very useful for investors trying to construct efficient portfolios using ETFs.
  2. MPT can also be used to construct a portfolio that minimizes risk for a given level of expected return.
  3. Modern portfolio theory (MPT) is a theory on how risk-averse investors can construct portfolios to maximize expected return based on a given level of market risk.
  4. Investors who are more concerned with downside risk than variance might prefer post-modern portfolio theory (PMPT) to MPT.

Meaning of Modern Portfolio Theory (MPT) & Modern Portfolio Theory (MPT) Definition