What is portfolio theory in simple words?

Portfolio Theory is concerned with risk and return. Therefore, the portfolio theory is about maximize the benefits of investments considering risk and return. In IS area, IT investments can be managed as a portfolio, combining risk and return to maximize the benefits of IT investment and choose the best.

What is the key lesson of modern portfolio theory?

The modern portfolio theory argues that any given investment’s risk and return characteristics should not be viewed alone but should be evaluated by how it affects the overall portfolio’s risk and return.

What is modern portfolio theory how it is different from traditional theory?

Through this traditional theory, investors has been getting the maximum return at the minimum risk. On the other hand, modern portfolio theory emphasizes on maximizing of return through a combination of securities.

What is portfolio theory briefly explain the key assumption of portfolio theory?

Modern portfolio theory (MPT) is a theory of investment which tries to maximize portfolio expected return for a given amount of portfolio risk, or equivalently minimize risk for a given level of expected return, by carefully choosing the proportions of various assets.

Why is it important in portfolio theory?

Covariance is an important measurement used in modern portfolio theory (MPT). Modern portfolio theory seeks to create an optimal mix of higher-volatility assets with lower-volatility assets. By diversifying the assets in a portfolio, investors can reduce risk and still allow for a positive return.

What is traditional portfolio theory?

Traditional portfolio management is a nonquantitative approach to balancing a portfolio with different assets, such as stocks and bonds, from different companies and different sectors as a way of reducing the overall risk of the portfolio.

What are portfolio in modern investment?

The Modern Portfolio Theory (MPT) refers to an investment theory that allows investors to assemble an asset portfolio that maximizes expected return for a given level of risk. The theory assumes that investors are risk-averse; for a given level of expected return, investors will always prefer the less risky portfolio.

What is the modern approach to the construction of an investment portfolio?

he modern approach of portfolio construction also known as Markowitz Approach emphasizes on selection of securities on the basis of risk and return analysis. The financial plan of an individual is audited in terms of risks and returns and efforts are made to maximize expected returns for a given level of risk.

What are the benefits of modern portfolio theory?

Modern portfolio theory holds that when various uncorrelated assets are combined in a portfolio, return is improved and risk is lowered. The risk level of the individual security does not matter as long as its return varies from the other securities in the portfolio.