Modern Portfolio Theory (MPT)

Modern Portfolio Theory (MPT) is an investment strategy that emphasizes optimizing the balance between risk and return. It suggests that by diversifying a portfolio—spreading investments across various assets like stocks, bonds, and real estate—investors can reduce risk while maximizing potential returns. MPT uses statistical measures to assess how assets move together, helping to identify the best mix of investments. The goal is to create an "efficient frontier," representing the highest expected return for a given level of risk, allowing investors to make more informed decisions based on their risk tolerance and investment goals.