Modern portfolio theory (MPT)
Principles of Finance glossary · Risk, Return & Portfolio Theory
Definition
Markowitz's framework of portfolio selection based on expected return and variance.
Modern portfolio theory (MPT) in plain English
Modern portfolio theory is the breakthrough idea that you shouldn't judge an investment by itself, but by how it behaves inside your whole collection. Its key insight: by mixing investments that don't all move together, you can lower your overall risk without giving up much expected return — a genuine free lunch from diversification. It boils every choice down to two numbers: how much you expect to earn (expected return) and how bumpy the ride is (variance). It's the reason 'don't put all your eggs in one basket' became actual math, and it earned Harry Markowitz a Nobel Prize.
Also called: MPT
Practice Modern portfolio theory (MPT)
In the context of Modern Portfolio Theory, what does 'Systematic Risk' represent?
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