Modern Portfolio Theory
About Modern Portfolio Theory
Harry Markowitz published Portfolio Selection in 1952, introducing the idea that investors should consider the risk and return of an entire portfolio rather than individual assets. Diversification could reduce risk without sacrificing return. Markowitz introduced the concept of the efficient frontier, the set of portfolios that maximize return for each level of risk. Modern Portfolio Theory earned Markowitz the Nobel Prize in 1990. MPT provided the mathematical foundation for asset allocation and index investing. Critics note that correlations between assets can increase during crises, reducing diversification benefits precisely when they are most needed. Despite criticism, MPT remains the basis for most institutional portfolio construction.
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