There has been a lot of talk about the demise of Modern Portfolio Theory. We still believe in Modern Portfolio Theory.
Modern portfolio theory is concerned with controlling risk (risk management) for the whole portfolio by allocation among asset classes that in themselves may be volatile (and correspondingly have higher returns), but whose returns are uncorrelated or have low correlations with each other. Simply put, risk is managed by investing in asset classes that are not expected to go down (or up) at the same time or to the same degree. In effect, this means that the addition of higher-return, more volatile asset classes to a portfolio will not necessarily increase the volatility (risk) of the portfolio as a whole, if the asset classes are uncorrelated or have low correlations.
Modern portfolio theory employs mathematical models to analyze expected returns, volatility, and correlations of individual asset classes. Many sophisticated techniques and investment vehicles can be used to help manage investment risk within desired parameters and, hopefully, to enhance returns.
We (Still) Believe in Modern Portfolio Theory
There has been a lot of talk about the demise of Modern Portfolio Theory. We still believe in Modern Portfolio Theory.
Modern portfolio theory is concerned with controlling risk (risk management) for the whole portfolio by allocation among asset classes that in themselves may be volatile (and correspondingly have higher returns), but whose returns are uncorrelated or have low correlations with each other. Simply put, risk is managed by investing in asset classes that are not expected to go down (or up) at the same time or to the same degree. In effect, this means that the addition of higher-return, more volatile asset classes to a portfolio will not necessarily increase the volatility (risk) of the portfolio as a whole, if the asset classes are uncorrelated or have low correlations.
Modern portfolio theory employs mathematical models to analyze expected returns, volatility, and correlations of individual asset classes. Many sophisticated techniques and investment vehicles can be used to help manage investment risk within desired parameters and, hopefully, to enhance returns.