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Modern Portfolio Theory (MPT)

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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.

Introduction to Modern Portfolio Theory

Modern Portfolio Theory (MPT), developed by Harry Markowitz in 1952, is a foundational concept in finance that guides investment strategy by balancing risk against expected returns. MPT introduces the idea of an 'efficient frontier', representing portfolios that provide the maximum expected return for a given level of risk. Investors are encouraged to select portfolios on this frontier to optimize their investment outcomes. The theory has been instrumental in the creation of other financial models, such as the Capital Asset Pricing Model (CAPM), and continues to be a key tool in investment management and risk evaluation.
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The Development and Influence of Portfolio Theory

Since its introduction, MPT has transformed the investment landscape from one of individual asset selection to a systematic approach that emphasizes diversification. The theory advocates for constructing a portfolio of varied assets to reduce unsystematic risk, thereby enhancing the potential for improved returns. Over time, MPT has led to the evolution of new financial theories and models, shaping contemporary investment strategies and risk management techniques. Its principles remain integral to the practice of financial planning and analysis.

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00

______ 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

01

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.

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