Modern Portfolio Theory (MPT), developed by Harry Markowitz in 1952 (Nobel Prize 1990), provides a mathematical framework for constructing portfolios that maximize return for a given level of risk. Key insight: combining assets with imperfect correlations produces portfolios with better risk/return profiles than any individual asset. The efficient frontier shows the optimal risk/return trade-offs. MPT underpins modern portfolio construction including target-date funds and robo-advisor allocations. Critics note MPT relies on historical correlations (which can break during crises) and normally-distributed returns (which fat-tailed reality contradicts). Despite limitations, MPT remains the foundational framework for asset allocation.
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Modern Portfolio Theory
August 22, 2026 · Aditya Gupta
Investing
Related terms
401(k)
A 401(k) is an employer-sponsored retirement plan where employees contribute pre-tax salary that grows tax-deferred until withdrawal. The…
Active Management
Active management is the attempt to outperform a benchmark through stock selection, sector rotation, market timing, or any…
Alpha
Alpha is excess return relative to a benchmark, adjusted for risk (beta). Positive alpha means an investment outperformed…
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Asset allocation is the percentage split of your portfolio across asset classes — typically stocks, bonds, and cash,…
Backdoor Roth
The Backdoor Roth is a strategy for high earners (above the Roth IRA income limit) to contribute to…
Beta
Beta measures a stock's volatility relative to the overall market (S&P 500 = beta of 1). Stocks with…
