modern portfolio theory

Understanding Modern Portfolio Theory: Importance, Portfolio Optimization, and Graphical Visualization

1. Introduction Modern Portfolio Theory (MPT) is a framework for constructing portfolios that aim to maximize expected returns while minimizing risk. It was introduced by Harry Markowitz in 1952. The theory is based on the idea that investors should not focus solely on individual securities but rather on the overall portfolio of investments. MPT provides a way to measure portfolio risk and return and provides tools to optimize investments. 1.1 Importance of Modern Portfolio Theory The significance of Modern Portfolio Theory lies in its ability to provide a rational approach to investment decisions.