Question

Difference between modern and traditional portfolio theories

Answer 1

Explanation:

Traditional Portfolio theory is one of the subjective analysis but it has provided positive results to many some people who have invested keeping in mind the individual securities. 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. It  discusses the relationship between different securities and then draws inter-relationships of risks between them.  This theory states that by combining a low risk security with the one with higher risk will ultimately result in a success by investor in making choice of investment.

Answer 2

Traditional theory

• It is a non-quantitative approach.
• In this theory, the risks are reduced by balancing different assets.  
• Here the assets are selected in a random way without any calculation.  

Modern portfolio theory

• It is a quantitative approach.  
• In this case, a list of assets is selected and a risk balance is produced to avoid the severity of the risks.  
• Here the assets are selected based on the calculations that are associated with the assets which include standard deviation, risk factors to the assets and so on.