Modern Portfolio Theory (MPT)

Set of concepts aimed at building a most efficient collection (portfolio) of different types of assets, based on the observation that although investors want high returns they dislike high risk (likelihood of the deviation of an actual return from the anticipated return). It suggests that the risk of a particular investment comprising a portfolio should be assessed on the basis of how its value varies in comparison with the market value of the entire portfolio, and not in isolation. And that a diversified portfolio of investments is efficient if it yields highest possible return for a given level of risk or incurs the lowest level of risk for a given amount of return. Developed by the Nobel laureate (1990) US economist Harry Markovitz (born 1927) in the early 1950's, it enables an investor to estimate and control the type and extent of return and the associated risk. Also called modern investment theory or portfolio theory. See also capital market theories and sharpe ratio.