The purpose of this article is to provide a brief explanation of
Markowitz’s modern portfolio theory and how you can use it to more effectively
allocate your investment portfolio.
Perhaps equally important to what will be covered is what is
excluded: this is not a mathematical derivation of the model. For a
thorough explanation of the math behind the model, see this article in Wikipedia. The objective of this article is to show how
you can apply modern portfolio theory in real life to create an optimized
portfolio.
In its simplest form,
portfolio theory is about finding the balance between maximizing your return and minimizing your risk. The objective is to
select your investments in such as way as to diversify your risks while not
reducing your expected return. It is actually simple to apply and
effective. While it does not replace the role of an informed investor, it
can provide a powerful tool to complement an actively managed portfolio.
Introduction to Modern Portfolio Theory
The purpose of this article is to provide a brief explanation of Markowitz’s modern portfolio theory and how you can use it to more effectively allocate your investment portfolio.
Perhaps equally important to what will be covered is what is excluded: this is not a mathematical derivation of the model. For a thorough explanation of the math behind the model, see this article in Wikipedia. The objective of this article is to show how you can apply modern portfolio theory in real life to create an optimized portfolio.
Portfolio theory
Introduction
In its simplest form, portfolio theory is about finding the balance between maximizing your return and minimizing your risk. The objective is to select your investments in such as way as to diversify your risks while not reducing your expected return. It is actually simple to apply and effective. While it does not replace the role of an informed investor, it can provide a powerful tool to complement an actively managed portfolio.Portfolio theory