In the world of investing, few theories have had as profound an impact as Modern Portfolio Theory (MPT) . Developed in 1952 by Harry Markowitz , this revolutionary framework transformed the way investors understand risk, return, and diversification. Today, we take a deep dive into the theory that earned Markowitz the Nobel Prize in Economics (1990) and continues to shape the foundations of modern investing. The Origins of Modern Portfolio Theory Before Markowitz, the common belief was simple: choose individual assets with high expected returns and low risk , and you’d do well. What Markowitz discovered, however, was that the key to successful investing lies not in individual assets, but in how they interact together in a portfolio . He introduced the idea that: “A portfolio’s risk is not just the sum of the risks of its components, but also how those components move in relation to one another.” This insight led to a quantitative framework for selecting a group ...
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