Modern Portfolio Theory

Most people are familiar with the general concept of diversification and the idea of risk and return. However, few investors realize that before the 1950’s, these concepts were not widely used. It was not until 1952, when Harry Markowitz combined the principals of diversification and risk/return, with the less familiar idea of correlation, to form the mathematical framework for building a portfolio of securities; what we now call Modern Portfolio Theory (MPT).

The key take away from his work is that if you are interested in balancing risk and return, then you must consider how each
part of your portfolio fits within the whole, rather than each part in isolation.


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