Modern Portfolio Theory
Modern portfolio theory refers to the quantitative practice of asset allocation that maximizes projected (ex ante) return for a portfolio while holding constant its overall exposure to risk. Or, inversely, minimizing overall risk for a given target portfolio return. The theory considers the covariance of constituent assets or asset classes within a portfolio, and the impact of an asset allocation change on the overall expected risk/return profile of the portfolio.
The theory was originally proposed by nobel-winning economist Harry Markowitz in the 1952 Journal of Finance, and is now a cornerstone of portfolio management practice. Modern portfolio theory generally supports a practice of diversifying toward a mix of assets and asset classes with a low degree of mutual correlation.Back to Glossary