Theory (MPT) and its role in asset allocation and diversification. The paper reviews arguments in favor of and against MPT, in addition to reviewing how MPT affects portfolio management.

MPT describes a theory on how risk-averse investors can build portfolios that optimize or maximize expected return based on a given level of market risk, while emphasizing that risk is an inherent factor of higher reward. MPT posits that it is possible to construct an "efficient frontier" of optimal portfolios that offer the maximum possible expected return for a given level of risk (Modern portfolio theory, 2011).

Modern Portfolio Theory

Typically, an investor looking for the ideal investment, would choose one whose attributes included high returns coupled with low risk. The ideal investment probably does not exist, but the search for it has caused financial managers and investment analysts to spend time to develop methods and strategies, many of which are...
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