Modern Portfolio Theory (MPT) is a financial framework developed by Harry Markowitz, focusing on risk-return balance through diversified portfolios. It introduces the 'efficient frontier' and underpins models like CAPM. MPT's assumptions, criticisms, and extensions like Behavioral Portfolio Theory are discussed, alongside its role in asset management and pricing.
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MPT guides investment strategy by balancing risk against expected returns
Definition of efficient frontier
The efficient frontier represents portfolios that provide the maximum expected return for a given level of risk
Optimization of investment outcomes
Investors are encouraged to select portfolios on the efficient frontier to optimize their investment outcomes
MPT has transformed the investment landscape from individual asset selection to a systematic approach that emphasizes diversification
MPT advocates for constructing a portfolio of varied assets to reduce unsystematic risk and enhance potential returns
MPT has led to the creation of other financial models, such as the Capital Asset Pricing Model (CAPM)
MPT remains a key tool in investment management and risk evaluation, shaping contemporary investment strategies and techniques
MPT's assumptions have been subject to scrutiny and debate, with criticisms highlighting the idealized nature of its assumptions
Real-world factors such as taxes, transaction costs, and investor psychology can significantly impact investment decisions and outcomes
The reliance on historical data to predict future performance is contentious, as past trends may not reliably indicate future market behavior
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______ Portfolio Theory, created by ______ ______ in ______, is a key concept in finance that advises on investment strategy by weighing risk against potential gains.
Modern
Harry
Markowitz
1952
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MPT's core principle
Diversification to reduce unsystematic risk and enhance returns.
02
MPT's impact on financial tools
Led to new financial theories and risk management models.
