Modern Portfolio Theory (MPT) is an investment strategy and framework that aims to maximize investment returns while managing risk by constructing well-diversified portfolios. It is based on the principle that an investor can optimize their portfolio by considering the trade-off between risk and return. MPT suggests that by combining assets with different risk levels and return expectations, investors can achieve an optimal balance that minimizes risk for a given level of expected return or maximizes expected return for a given level of risk. MPT emphasizes the importance of diversification and considers the correlation between assets to reduce portfolio volatility.
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