Modern Portfolio Theory
Definition
What is Modern Portfolio Theory?
A framework for combining assets based on expected returnThe probability-weighted average of possible future returns or an estimate of future return., risk, and correlationA statistic ranging from minus one to plus one that describes how two return series move together..
Example in practice
How This Looks in Practice
The framework shows why a diversified portfolioThe complete collection of investments owned by an investor or managed under one mandate. can be less risky than its individual holdings.
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Related Terms
Capital Asset Pricing Model
A model linking expected return to the risk-free rate, market risk premium, and an asset's beta.
Portfolio TheorySecurity Market Line
A line showing the CAPM relationship between expected return and beta.
Portfolio TheoryEfficient Frontier
The set of portfolios offering the highest expected return for each level of risk under stated assumptions.
Fraud & ScamsPonzi Scheme
A fraud that pays earlier participants using money from newer participants rather than genuine investment profits.