




Introduced by Nobel Prize winner Harry Markowitz in the 1950s, modern portfolio theory proposes that investors may minimize market risk for an expected level of return by constructing a diversified portfolio. Modern portfolio theory emphasizes portfolio diversification over the selection of individual securities. A simplified version of modern portfolio theory is "Don't put your eggs in one basket". Modern portfolio theory established the concept of the "efficient frontier." An efficient portfolio, according to modern portfolio theory, is one that has the lowest risk for a given level of expected return. An underlying concept of modern portfolio theory is that greater risk is associated with higher expected returns. To construct a portfolio consistent with modern portfolio theory, investors must evaluate the correlation between asset classes as well as the risk/return characteristics of each asset. Modern portfolio theory offers a disciplined approach to investing that is still widely used today.
Rate this modern portfolio theory definition...




Where is the market headed? The answer may surprise you. Find out with the exclusive & Barron's recommended charts of Chart of the Day. 

Popular Terms: 1035 exchange, phantom income, command economy, diluted share, LIBOR, per diem, exdividend date, debt service coverage, cancelled check, Zero Cost Collar, dividends payable, implied volatility, 1031 exchange, labor relations, 144a, covered put, irrevocable trust, class C shares, quality assurance, liquidity ratio, annual return, deferred tax, margin rate, reverse mortgage, deferred revenue, inflation, stock market close, limit order, retained earnings, VIX, current ratio, FTSE, Key Rate Duration, balance sheet, APR, required rate of return, stock split, FICO score, 401a, minority interest, open position, real GDP, option premium, whollyowned subsidiary, risk management, exdividend, in escrow, average price per share, EBITDA


 