Modern Portfolio Theory
InvestingGlossary term
Definition
A framework developed by Harry Markowitz that shows how investors can construct portfolios to maximize expected return for a given level of risk through diversification. The theory demonstrates that portfolio risk depends not just on individual assets but on how they correlate.
Related terms
- Correlation (Investing)A statistical measure of how two investments move in relation to each other, ranging from -1 (perfect inverse) to +1 (perfect sync). Low or negative correlation between assets is the foundation of diversification, as losses in one may be offset by gains in another.
- Efficient Market HypothesisA theory stating that asset prices fully reflect all available information, making it impossible to consistently outperform the market through stock picking or market timing. This hypothesis is the theoretical foundation for passive investing strategies.
- Asset AllocationAn investment strategy that balances risk and reward by dividing investments among different asset categories, such as stocks, bonds, and cash, based on goals and risk tolerance.
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