Modern Portfolio Theory

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  • A statistical technique used to show how a diversified portfolio of assets, such as stocks, can reduce risk and improve the portfolio performance. The theory suggests that the risk of an individual asset or stock should not be considered on the basis of its volatility or variation from its expected return. Instead, it should be considered in relation to its incremental or marginal contribution to the total risk of a portfolio of assets or stocks. The addition of an asset to a portfolio will affect the portfolio's risk depending on whether the individual asset has a negative or positive correlation to the price movements of the individual assets in the portfolio. Modern portfolio theory was first developed in 1952 by Harry Markowitz by applying ...

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