The Benefits of Modern Portfolio Theory
by Charles Rotblut, CFA
There is a secret to investing that many investors are never told: You can achieve higher returns and reduce your portfolio’s level of risk at the same time. Yes, you read that right, higher returns and lower risk are both possible.
This is not a magic formula designed by someone to sell you a get-rich-quick scheme. Rather, the creator of this strategy was awarded a Nobel Prize in economics.
In this article
- Modern Portfolio Theory
- The Efficient Market Frontier
- Putting Theory Into Action
- Other Considerations
Share this article
Facebook
Twitter
E-mail
SeekingAlpha
Stumbleupon
Delicious
LinkedIn
Modern Portfolio Theory
In 1952, Harry Markowitz wrote an essay titled “Portfolio Selection” that became the basis for modern portfolio theory (MPT). Modern portfolio theory holds that when various uncorrelated assets are combined in a portfolio, return is improved and risk is lowered. The risk level of the individual security does not matter as long as its return varies from the other securities in the portfolio.
When constructing a portfolio, you could opt for an extremely low-risk, but unsatisfactory long-term portfolio by holding only short-term government bonds. At the other extreme, you could create a long-term portfolio comprised of only high-growth stocks.
To read more, please become an AAII Registered User or CLICK HERE.
Discussion
Am I the only one NOT getting the chart? All I get is a black line.
posted over 2 years ago by Joe from North Carolina
Am I the only one NOT getting the chart? All I get is a black line.
posted over 2 years ago by Joe from North Carolina
Am I the only one NOT getting the chart? All I get is a black line.
posted over 2 years ago by Joe from North Carolina
Me,too. I get the same black block that instructs me to click on it to see entire chart. No luck
posted over 2 years ago by Lee from Florida
Hi Joe
I don't get the link either but if you click the
http://www.aaii.com/journal/article/the-benefits-of-modern-portfolio-theory.pdf
or printer
http://www.aaii.com/journal/article/the-benefits-of-modern-portfolio-theory.mobile
links top left above you can see the graph.
:-)
posted over 2 years ago by Shawn from California
oops...not the printer link--just the pdf link:
http://www.aaii.com/journal/article/the-benefits-of-modern-portfolio-theory.pdf
:-)
posted over 2 years ago by Britni from California
The problem with this theory is that it equates volatility (SD) with risk. If this basic premise is incorrect, then the whole "efficient market frontier" theory fall apart.
posted over 2 years ago by Praveen from Ohio
I agree with Praveen.
Let's consider this idea. MPT is based on so-called "buy and hold" strategy, where risk (volatility) is inevitable part of every given financial instrument and this risk is tied to the given expected return on investment. What if there is a theory that focuses on actively managing both sides of every investment: return and risk. By managing (via active trading or speculative investing), you can separate these two sides of every coin and deal with them through diferent risk management and trading tools. You can definitelly get better results...
posted over 2 years ago by Jan from Illinois
Has your theory been put to the test? Is a Noble Prize in your future? Jan from Illinois and Praveen from Ohio.
posted 11 months ago by Faye from Indiana
