What is a modern portfolio theory?
Modern portfolio theory, or MPT, is an attempt to optimize the risk remuneration of investment portfolios. The modern portfolio theory created by Harry Markowitz, who won the Nobel Prize for the theory for theory, presented the idea of diversification as a tool to reduce the risk of the entire portfolio without giving up high yields.
The key concept in modern portfolio theory is beta . Beta is a measure of how many financial instruments such as stocks, price changes in relation to its market. This is also referred to as its deviation . For example, a stock that is 2%, on average, when the S&P 500 is 1%, would have beta 2. On the contrary, shares that are on average in the opposite direction of the market should have a negative beta. In a wide sense, beta is a measure of the risk of investment; The higher the absolute value of beta, the more risky investment.Ative Betas to create a portfolio with a minimum beta for a group of shares acquired as a whole. What is doing attractive, at least theoristKy, the yields do not cancel each other, but rather accumulate. For example, ten shares, each expected to earn 5%, but risky in themselves, can potentially combine into a portfolio with a very low risk that maintains a 5% expected return.
Modern Portfolio theory uses a portfolio model of capital assets or CAPM. Using beta and the concept of risk -free yield (eg short -term US cash registers), CAPM is used to calculate the theoretical price for a potential investment. If the investment is sold at lower than this price, it is a candidate for inclusion in the portfolio.
While theoretically impressive, modern portfolio theory has caused serious criticism from many neighborhoods. The principle of parties is with the concept of beta; Although it is possible to measure the historic beta beta for investment, it is not possible to know what his beta will be forward. Without this knowledge is actually impossible to jokeDate theoretically perfect portfolio. This objection was strengthened by numerous studies that show that portfolios constructed according to theory do not have lower risks than other types of portfolios.
Modern portfolio theory also assumes that it is possible to choose investments whose performance is independent of other investments in the portfolio. Market historians have shown that such tools do not exist; At times of market stress, seemingly independent investments actually behave as if they were related.