Does modern portfolio theory still work?
Answers
Hey....
Answer:
The Theory
The TheoryEssentially, investors can reduce risk through diversification using a quantitative method. Modern portfolio theory says that it is not enough to look at the expected risk and return of one particular stock. ... Each stock has its own standard deviation from the mean, which modern portfolio theory calls "risk."
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Answer:
Markowitz four assumptions are no less relevant today than they were over half a century ago. Investors are still risk averse, but they are also rational. Providing them with a means of optimizing their returns versus their risk continues to be an exceptionally valuable method for brokers and investment firms to this day.
No investor need fear losing everything on a bubble in the economy when they apply MPT to at least a portion of their assets. The standard portfolio investment is 50 percent into real estate, 40 percent in stocks, and 10 percent in bonds. This allocation of resources best follows Markowitz Efficient Frontier, and maintains a high level return. Here’s the reasoning behind the 50-40-10 model: