Modern Portfolio Theory (MPT)
MPT is Markowitz's 1952 framework for constructing portfolios to maximize expected return for a given risk level through diversification.
Exam Tip
MPT = Markowitz 1952. Diversification reduces unsystematic risk (not systematic). Correlation < 1 provides benefit.
What is MPT?
Harry Markowitz won the 1990 Nobel Prize for proving diversification reduces portfolio risk.
Core Principle
Evaluate assets by how they affect PORTFOLIO risk/return, not individually.
Key Concepts
- Expected return
- Standard deviation (risk)
- Correlation
- Efficient frontier
Risk Types
- Systematic: Cannot diversify away
- Unsystematic: CAN diversify away
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