Modern Portfolio Theory

Definition - What does Modern Portfolio Theory mean?

Modern Portfolio Theory is an investing approach that looks at the overall return and risk of a portfolio as a whole, not as a collection of single investments.

Testopedia explains Modern Portfolio Theory

Modern portfolio theory is based on the concept that investors are risk adverse. Through diversification of investments and asset classes, portfolios can be constructed with higher levels of expected return for each unit of risk assumed. Asset classes are divided into three main categories, stocks, bonds, and, cash and cash equivalents. Portfolio managers, through modern portfolio theory, can construct portfolios based on various allocations over the three main asset classes whose return will be the greatest given each unit of risk.

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