FE501 – 1207 Extra Modern Portfolio Theory

Introduction

It is an investment theory based on the idea that risk-averse investors can construct portfolios to optimize or maximize expected return based on a given level of market risk

An investor can reduce portfolio risk simply by holding combinations ofinstruments that are not perfectly positively correlated.

To reduce risk, diversify.

If all the asset pairs have correlations of 0—they are perfectly uncorrelated—theportfolio's return variance is the sum over all assets of the square of thefraction held in the asset times the asset's return variance (and the portfoliostandard deviation is the square root of this sum).

For further information, check the attached files.

List of files attached:

1. Markowitz Mean-Variance Portfolio Theory*

2. Modern Portfolio Theory

3. A SIMPLIFIED PERSPECTIVE OF THE MARKOWITZ

PORTFOLIO THEORY