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Modern portfolio theory

Modern portfolio theory is a way of understanding the interaction between risk and reward for investors. It has shaped how fund managers and other investors choose which shares to invest in. It has also influenced how companies approach risk management.

When to use it

  • To decide what shares (or other assets) to put in your investment portfolio.
  • To understand the different types of risks you take when investing money.

Origins

After observing that the prevailing security selection methods were lacking, Harry Markowitz published ‘Portfolio selection’ in the Journal of Finance in 1952, introducing a new concept called ‘modern portfolio theory’. Before Markowitz’s theory, the prevailing ‘best practice’ in the securities ...

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