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What is Modern Portfolio Theory?

Definition of Modern Portfolio Theory

Modern Portfolio Theory (MPT) is a financial theory that attempts to maximise expected return for a given amount of risk, or minimise the risk for a given level of expected return, by indicating the proportions of various assets that should be acquired. Essentially, MPT is a mathematical formulation of the concept of diversification, in reference to investment, with the goal of selecting a group of assets that has a collectively lower risk than any individual asset. Despite MPT's use by many in the financial industry, it has been widely criticised in recent years by fields such as behavioral economics for the financial returns not following any symmetric distribution and that correlations between asset classes are not fixed, as they can be varied by idiosyncratic events.
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